THE PROBLEM OF THE RUPEE

PREFACE

In the following pages I have attempted an exposition of the events leading to the establishment of the exchange standard and an examination of its theoretical basis.

In endeavouring to treat the historical side of the matter I have carefully avoided repeating what has already been said by others. For instance, in treating of the actual working of the exchange standard I have contented myself with a general treatment just sufficiently detailed to enable the reader to follow the criticism I have offered. If more details are desired they are given in all their amplitude in other treatises. To have reproduced them would have been a work of supererogation; besides it would have only obscured the general trend of my argument. But in other respects I have been obliged to take a wider historical sweep than has been done by other writers. The existing treatises on Indian currency do not give any idea, at least an adequate idea, of the circumstances which led to the reforms of 1893. I think that a treatment of the early history is quite essential to furnish the reader with a perspective in order to enable him to judge for himself the issues involved in the currency crisis and also of the solutions offered. In view of this I have gone into that most neglected period of Indian currency extending from 1800 to [pg vi] 1893. Not only have other writers begun abruptly the story of the exchange standard, but they have popularised the notion that the exchange standard is the standard originally contemplated by the Government of India. I find that this is a gross error. Indeed the most interesting point about Indian currency is the way in which the gold standard came to be transformed into a gold exchange standard. Some old but by now forgotten facts had therefore to be recounted to expose this error.

On the theoretical side there is no book but that of Professor Keynes which makes any attempt to examine its scientific basis. But the conclusions he has arrived at are in sharp conflict with those of mine. Our differences extend to almost every proposition he has advanced in favour of the exchange standard. This difference proceeds from the fundamental fact, which seems to be quite overlooked by Professor Keynes, that nothing will stabilise the rupee unless we stabilise its general purchasing power. That the exchange standard does not do. That standard concerns itself only with symptoms and does not go to the disease: indeed, on my showing, if anything, it aggravates the disease.

When I come to the remedy I again find myself in conflict with the majority of those who like myself are opposed to the exchange standard. It is said that the best way to stabilise the rupee is to provide for effective convertibility into gold. I do not deny that this is one way of doing it. But I think a far better way would be to have an inconvertible rupee with a fixed limit of issue. Indeed, if I had any say in the matter I would propose that the Government of India should melt the rupees, sell them as [pg vii] bullion and use the proceeds for revenue purposes and fill the void by an inconvertible paper. But that may be too radical a proposal, and I do not therefore press for it, although I regard it as essentially sound. In any case the vital point is to close the Mints not merely to the public, as they have been, but to the Government as well. Once that is done I venture to say that the Indian currency, based on gold as legal tender with a rupee currency fixed in issue, will conform to the principles embodied in the English currency system.

It will be noticed that I do not propose to go back to the recommendations of the Fowler Committee. All those who have regretted the transformation of the Indian currency from a gold standard to a gold exchange standard have held that everything would have been all right if the Government had carried out in toto the recommendations of that Committee. I do not share that view. On the other hand, I find that the Indian currency underwent that transformation because the Government carried out those recommendations. While some people regard that Report as classical for its wisdom, I regard it as classical for its nonsense. For I find that it was this Committee which, while recommending a gold standard, also recommended and thereby perpetuated the folly of the Herschell Committee, that Government should coin rupees on its own account according to that most naïve of currency principles, the requirements of the public, without realising that the latter recommendation was destructive of the former. Indeed, as I argue, the principles of the Fowler Committee must be given up if we are to place the Indian currency on a stable basis. [pg viii]

I am conscious of the somewhat lengthy discussions on currency principles into which I have entered in treating the subject. My justification of this procedure is two-fold. First of all, as I have differed so widely from other writers on Indian currency, I have deemed it necessary to substantiate my view-point even at the cost of being charged with over-elaboration. But it is my second justification which affords me a greater excuse. It consists in the fact that I have written primarily for the benefit of the Indian public, and, as their grasp of currency principles does not seem to be as good as one would wish it to be, an over-statement, it will be agreed, is better than an understatement of the argument on which I have based my conclusions.

Up to 1913, the Gold Exchange Standard was not the avowed goal of the Government of India in the matter of Indian Currency, and although the Chamberlain Commission appointed in that year had reported in favour of its continuance, the Government of India had promised not to carry its recommendations into practice till the war was over and an opportunity had been given to the public to criticize them. When, however, the Exchange Standard was shaken to its foundations during the late war, the Government of India went back on its word and restricted, notwithstanding repeated protests, the terms of reference to the Smith Committee to recommending such measures as were calculated to ensure the stability of the Exchange Standard, as though that standard had been accepted as the last word in the matter of Indian Currency. Now that the measures of the Smith Committee have not ensured the stability of the Exchange Standard, it is given [pg ix] to understand that the Government, as well as the public, desire to place the Indian Currency System on a sounder footing. My object in publishing this study at this juncture is to suggest a basis for the consummation of this purpose.

I cannot conclude this preface without acknowledging my deep sense of gratitude to my teacher, Prof. Edwin Cannan, of the University of London (School of Economics). His sympathy towards me and his keen interest in my undertaking have placed me under obligations which I can never repay. I feel happy to be able to say that this work has undergone close supervision at his hands, and although he is in no way responsible for the views I have expressed, I can say that his severe examination of my theoretic discussions has saved me from many an error. To Professor Wadia, of Wilson College, I am thankful for cheerfully undertaking the dry task of correcting the proofs. [pg x]

[pg xi]

FOREWORD

I am glad that Mr. Ambedkar has given me the opportunity of saying a few words about his book.

As he is aware, I disagree with a good deal of his criticism. In 1893 I was one of the few economists who believed that the rupee could be kept at a fixed ratio with gold by the method then proposed, and I did not fall away from the faith when some years elapsed without the desired fruit appearing (see Economic Review, July 1898, pp. 400—403). I do not share Mr. Ambedkar's hostility to the system, nor accept most of his arguments against it and its advocates. But he hits some nails very squarely on the head, and even when I have thought him quite wrong, I have found a stimulating freshness in his views and reasons. An old teacher like myself learns to tolerate the vagaries of originality, even when they resist “severe examination” such as that of which Mr. Ambedkar speaks.

In his practical conclusion I am inclined to think he is right. The single advantage offered to a country by the adoption of the gold-exchange system instead of the simple gold standard is that it is cheaper, in the sense of requiring a little less value in the shape of metallic currency than the gold standard. But all that can be saved in this way is a trifling amount, almost infinitesimal beside the advantage of having a currency more difficult for [pg xii] administrators and legislators to tamper with. The recent experience both of belligerents and neutrals certainly shows that the simple gold standard, as we understood it before the war, is not fool-proof, but it is far nearer being fool-proof and knave-proof than the gold-exchange standard. The percentage of administrators and legislators who understand the gold standard is painfully small, but it is and is likely to remain ten or twenty times as great as the percentage which understands the gold-exchange system. The possibility of a gold-exchange system being perverted to suit some corrupt purpose is very considerably greater than the possibility of the simple gold standard being so perverted.

The plan for the adoption of which Mr. Ambedkar pleads, namely that all further enlargement of the rupee issue should be permanently prohibited, and that the mints should be open at a fixed price to importers or other sellers of gold, so that in course of time India would have, in addition to the fixed stock of rupees, a currency of meltable and exportable gold coins, follows European precedents. In eighteenth-century England the gold standard introduced itself because the legislature allowed the ratio to remain unfavourable to the coinage of silver: in nineteenth-century France and other countries it came in because the legislatures definitely closed the mints to silver when the ratio was favourable to the coinage of silver. The continuance of a mass of full legal tender silver coins beside the gold would be nothing novel in principle, as the same thing, though on a somewhat smaller scale, took place in France, Germany, and the United States.

It is alleged sometimes that India does not want [pg xiii] gold coins. I feel considerable difficulty in believing that gold coins of suitable size would not be convenient in a country with the climate and other circumstances of India. The allegation is suspiciously like the old allegation that the “Englishman prefers gold coins to paper,” which had no other foundation than the fact that the law prohibited the issue of notes for less than £5 in England and Wales, while in Scotland, Ireland, and almost all other English-speaking countries notes for £1 or less were allowed and circulated freely. It seems much more likely that silver owes its position in India to the decision which the Company made before the system of standard gold and token silver was accidentally evolved in 1816 in England, and long before it was understood: and that the position has been maintained not because Indians dislike gold, but because Europeans like it so well that they cannot bear to part with any of it.

This reluctance to allow gold to go to the East is not only despicable from an ethical point of view. It is also contrary to the economic interest not only of the world at large, but even of the countries which had a gold standard before the war and have it still or expect soon to restore it. In the immediate future gold is not a commodity the use of which it is desirable for these countries either to restrict or to economize. From the closing years of last century it has been produced in quantities much too large to enable it to retain its purchasing power and thus be a stable standard of value unless it can constantly be finding existing holders willing to hold larger stocks, or fresh holders to hold new stocks of it. Before the war the accumulation of hoards by [pg xiv] various central banks in Europe took off a large part of the new supplies and prevented the actual rise of general prices being anything like what it would otherwise have been, though it was serious enough. Since the war the Federal Reserve Board, supported by all Americans who do not wish to see a rise of prices, has taken on the new “White Man's Burden” of absorbing the products of the gold mines, but just as the United States failed to keep up the value of silver by purchasing it, so she will eventually fail to keep up the value of gold. In spite of the opinion of some high authorities, it is not at all likely that a renewed demand for gold reserves by the central banks of Europe will come to her assistance. Experience must gradually be teaching even the densest of financiers that the value of paper currencies is not kept up by stories of “cover” or “backing” locked up in cellars, but by due limitation of the supply of the paper. With proper limitation enforced by absolute convertibility into gold coin which may be freely melted or exported, it has been proved by theory and experience that small holdings of gold are perfectly sufficient to meet all internal and international demands. There is really more chance of a great demand from individuals than from the banks. It is conceivable that the people of some of the countries which have reduced their paper currency to a laughing stock may refuse all paper and insist on having gold coins. But it seems more probable that they will be pleased enough to get better paper than they have recently been accustomed to, and will not ask for hard coin with sufficient insistence to get it. On the whole it seems fairly certain that the demand of Europe and [pg xv] European-colonised lands for gold will be less rather than greater than before the war, and that it will increase very slowly or not at all.

Thus on the whole there is reason to fear a fall in the value of gold and a rise of general prices rather than the contrary.

One obvious remedy would be to restrict the production of gold by international agreement, thus conserving the world's resources in mineral for future generations. Another is to set up an international commission to issue an international paper currency so regulated in amount as to preserve an approximately stable value. Excellent suggestions for the professor's classroom, but not, at present at any rate nor probably for some considerable period of time, practical politics.

A much more practical way out of the difficulty is to be found in the introduction of gold currency into the East. If the East will take a large part of the production of gold in the coming years it will tide us over the period which must elapse before the most prolific of the existing sources are worked out. After that we may be able to carry on without change or we may have reached the possibility of some better arrangement.

This argument will not appeal to those who can think of nothing but the extra profits which can be acquired during a rise of prices, but I hope it will to those who have some feeling for the great majority of the population, who suffer from these extra and wholly unearned profits being extracted from them. Stability is best in the long run for the community.

[pg xvii]

[pg 1]

THE PROBLEM OF THE RUPEE

CHAPTER I

Trade is an important apparatus in a society based on private property and pursuit of individual gain; without it, it would be difficult for its members to distribute the specialised products of their labour. Surely a lottery or an administrative device would be incompatible with its nature. Indeed, if it is to preserve its character, the only mode for the necessary distribution of the products of separate industry is that of private trading. But a trading society is unavoidably a pecuniary society, a society which of necessity carries on its transactions in terms of money. In fact, the distribution is not primarily an exchange of products against products, but products against money. In such a society, money therefore necessarily becomes the pivot on which everything revolves. With money as the focusing-point of all human efforts, interests, desires and ambitions, a trading society is bound to function in a régime of price where successes and failures are results of nice calculations of price-outlay as against price-product.

Economists have no doubt insisted that “there cannot … be intrinsically a more significant thing than money,” which at best is only “a great wheel by means of which every individual in society has his subsistence, conveniences and amusements regularly distributed to him [pg 2] in their proper proportions.” Whether or not money values are the definitive terms of economic endeavour may well be open to discussion.¹ But this much is certain, that without the use of money this “distribution of subsistence, conveniences and amusements,“ far from being a matter of course, will be distressingly hampered if not altogether suspended. How can this trading of products take place without money? The difficulties of barter have ever formed an unfailing theme with all economists, including those who have insisted that money is only a cloak. Money is not only necessary to facilitate trade by obviating the difficulties of barter, but is also necessary to sustain production by permitting specialisation. For who would care to specialise if he could not trade his products for those of others which he wanted? Trade is the handmaid of production, and where the former cannot flourish the latter must languish. It is therefore evident that if a trading society is not to be out of gear and is not to forego the measureless advantages of its automatic adjustments in the great give-and-take of specialised industry, it must provide itself with a sound system of money.²

At the close of the Moghul Empire, India, judged by the standards of the time, was economically an advanced country. Her trade was large, her banking institutions were well developed, and credit played an appreciable part in her transactions. But a medium of exchange and a common standard of value were among others the most supreme desiderata in the economy of the Indian people when they came, in the middle of the eighteenth century, under the sway of the British. Before the occurrence of this event, the money of India consisted of both gold and silver. Under the Hindu emperors the emphasis was laid on gold, while under the Mussalmans silver formed a large [pg 3] part of the circulating medium.³ Since the time of Akbar, the founder of the economic system of the Moghul Empire in India, the units of currency had been the gold mohur and the silver rupee. Both coins, the mohur and the rupee, were identical in weight, i.e. 175 grs. troy,⁴ and were “supposed to have been coined without any alloy, or at least intended to be so.”⁵ But whether they constituted a single standard of value or not is a matter of some doubt. It is believed that the mohur and the rupee, which at the time were the common measure of value, circulated without any fixed ratio of exchange between them. The standard, therefore, was more of the nature of what Jevons called a parallel standard⁶ than a double standard.⁷ That this want of ratio could not have worked without some detriment in practice is obvious. But it must be noted that there existed an alleviating circumstance in the curious contrivance by which the mohur and the rupee, though unrelated to each other, bore a fixed ratio to the dam, the copper coin of the Empire.⁸ So that it is permissible to hold that, as a consequence of being fixed to the same thing, the two, the mohur and the rupee, circulated at a fixed ratio.

In Southern India, to which part the influence of the [pg 4] Moghuls had not extended, silver as a part of the currency system was quite unknown. The pagoda, the gold coin of the ancient Hindu kings, was the standard of value and also the medium of exchange, and continued to be so till the time of the East India Company.

The right of coinage, which the Moghuls always held as inter jura Majestatis,⁹ be it said to their credit was exercised with due sense of responsibility. Never did the Moghul Emperors stoop to debase their coinage. Making allowance for the imperfect technology of coinage, the coins issued from the various Mints situated even in the most distant parts of their Empire¹⁰ did not materially deviate from the standard.

Name of the Rupee	Weight in pure Grs.	Name of the Rupee	Weight in pure Grs.
Akabari of Lahore	175·0	Delhi Sonat	175·0
Akabari of Agra	174·0	Delhi Alamgir	175·0
Jehangiri of Agra	174·6	Old Surat	174·0
Jehangiri of Allahabad	173·6	Murshedabad	175·9
Jehangiri of Kandahar	173·9	Persian Rupee of 1745	174·5
Shehajehani of Agra	175·0	Old Dacca	173·3
Shehajehani of Ahamadabad	174·2	Muhamadshai	170·0
Shehajehani of Delhi	174·2	Ahamadshai	172·8
Shehajehani of Delhi	175·0	Shaha Alam (1772)	175·8
Shehajehani of Lahore	174·0

[pg 5] The table on p. 4 of the assays of the Moghul rupees shows how the coinage throughout the period of the Empire adhered to the standard weight of 175 grs. pure.¹¹

So long as the Empire retained unabated sway there was advantage rather than danger in the plurality of Mints, for they were so many branches of a single department governed by a single authority. But with the disruption of the Moghul Empire into separate kingdoms these branches of the Imperial Mint located at different centres became independent factories for purposes of coinage. In the general scramble for independence which followed the fall of the Empire, the right to coinage, as one of the most unmistakable insignia of sovereignty, became the right most cherished by the political adventurers of the time. It was the last privilege to which the falling dynasties clung, and was also the first to which the adventurers rising to power aspired. The result was that the right, which was at one time so religiously exercised, came to be most wantonly abused. Everywhere the Mints were kept in full swing, and soon the country was filled with diverse coins which, while they proclaimed the incessant rise and fall of dynasties, also presented bewildering media of exchange. If these money-mongering sovereigns had kept up their issues to the original standard of the Moghul Emperors the multiplicity of coins of the same denomination would not have been a matter of much concern. But they seemed to have held that as the money used by their subjects was made by them, they could do what they liked with their own, and proceeded to debase their coinage to the extent each chose without altering the denominations. Given the different degrees of debasement, the currency necessarily lost its primary quality of general and ready acceptability.

The evils consequent upon such a situation may well be imagined. When the contents of the coins belied the value indicated by their denomination they became mere merchandise and there was no more a currency by tale to act as a ready means of exchange. The bullion value of each coin had to be ascertained before it could be accepted as a final [pg 6] discharge of obligations.¹² The opportunity for defrauding the poor and the ignorant thus provided could not have been less¹³ than that known to have obtained in England before the great re-coinage of 1696. This constant weighing, valuing, and assaying the bullion contents of coins was, however, only one aspect in which the evils of the situation made themselves felt. They also presented another formidable aspect. With the vanishing of the Empire there ceased to be such a thing as an Imperial legal tender current all through India. In its place there grew up local tenders current only within the different principalities into which the Empire was broken up. Under such circumstances exchange was not liquidated by obtaining in return for wares the requisite bullion value from the coins tendered in payment. Traders had to be certain that the coins were also legal tender of their domicile. The Preamble to the Bengal Currency Regulation XXXV, of 1793, is illuminating on this point. It says:—

“The principal districts in Bengal, Bihar and Orissa, have each a distinct silver currency … which are the standard measure of value in all transactions in the districts in which they respectively circulate.

――――――――

“In consequence of the Ryots being required to pay their rent in a particular sort of rupee they of course demanded it from manufacturers in payment of their grain, or raw [pg 7] materials, whilst the manufacturers, actuated by similar principles with the Ryots, required the same species of rupee from the traders who came to purchase their cloth or their commodities.

“The various sorts of old rupees, accordingly, soon became the established currency of particular districts, and as a necessary consequence the value of each rupee was enhanced in the district in which it was current, for being in demand for all transactions. As a further consequence, every sort of rupee brought into the district was rejected from being a different measure of value from that by which the inhabitants had become accustomed to estimate their property, or, if it was received, a discount was exacted upon it, equal to what the receiver would have been obliged to pay upon exchanging it at the house of a shroff for the rupee current in the district, or to allow discount upon passing it in payment to any other individual.

――――――――

“From this rejection of the coin current in one district when tendered in payment in another, the merchants and traders, and the proprietors and cultivators of land in different parts of the country, are subjected in their commercial dealings with each other to the same losses by exchange, and all other inconveniences that would necessarily result were the several districts under separate and independent governments, each having a different coin.”

Here was a situation where trade was reduced to barter, whether one looks upon barter as characterised by the absence of a common medium of exchange or by the presence of a plurality of the media of exchange; for in any case, it is obvious that the want of a “double coincidence” must have been felt by people engaged in trade. One is likely to think that such could not have been the case as the medium was composed of metallic counters. But it is to be remembered that the circulating coins on India, by reason of the circumstance attendant upon the diversity in their fineness and legal tender, formed so many different species that an exchange against a particular species did not necessarily close the transaction; the coin must, in certain circumstances, have been only an intermediate to be further bartered against another, and so on till the one of the requisite species was [pg 8] obtained. This is sufficient indication that society had sunk into a state of barter. If this alone was the flaw in the situation, it would have been only as bad as that of international trade under diversity of coinages. But it was further complicated by the fact that although the denomination of the coins was the same, their metallic contents differed considerably. Owing to this, one coin bore a discount or a premium in relation to another of the same name. In the absence of knowledge as to the amount of premium or discount, every one cared to receive a coin of the species known to him and current in his territory. On the whole the obstacles to commerce arising from such a situation could not have been less than those emanating from the mandate of Lycurgus, who compelled the Lacedæmonians to use iron money in order that its weight might prevent them from overmuch trading. The situation, besides being irritating, was aggravated by the presence of an element of gall in it. Capital invested in providing a currency is a tax upon the productive resources of the community. Nevertheless, wrote James Wilson¹⁴ no one would question

“that the time and labour which are saved by the interposition of coin, as compared with a system of barter, form an ample remuneration for the portion of capital withdrawn from productive sources, to act as a single circulator of commodities, by rendering the remainder of the capital of the country so much the more productive.”

What is, then, to be said of a monetary system which did not obviate the evil consequences of barter, although enormous capital was withdrawn from productive sources, to act as a single circulator of commodities? Diseased money is worse than want of money. The latter at least saves the cost. But society must have money, and it must be good money, too. The task, therefore, of evolving good money out of bad money fell upon the shoulders of the English East India Company, who had in the meanwhile succeeded to the Empire of the Moghuls in India.

The lines of reform were first laid down by the Directors [pg 9] of the Company in their famous Despatch, dated April 25, 1806,¹⁵ to the authorities administering their territories in India. In this historic document they observed:—

“17. It is an opinion supported by the best authorities, and proved by experience, that coins of gold and silver cannot circulate as legal tenders of payment at fixed relative values … without loss; this loss is occasioned by the fluctuating value of the metals of which the coins are formed. A proportion between the gold and silver coin is fixed by law, according to the value of the metals, and it may be on the justest principles, but owing to the change of circumstances gold may become of greater value in relation to silver than at the time the proportion was fixed, it therefore becomes profitable to exchange silver or gold, so the coin of that metal is withdrawn from circulation; and if silver should increase in its value in relation to gold, the same circumstances would tend to reduce the quantity of silver coin in circulation. As it is impossible to prevent the fluctuation in the value of the metals, so it is also equally impracticable to prevent the consequences thereof on the coins made from these metals … To adjust the relative values of gold and silver coin according to the fluctuations in the values of the metals would create continual difficulties, and the establishment of such a principle would of itself tend to perpetuate inconvenience and loss.”

They therefore declared themselves in favour of monometallism as the ideal for the Indian currency of the future, and prescribed:—

“21. … that silver should be the universal money of account [in India], and that all … accounts should be kept in the same denominations of rupees, annas and pice …”

The rupee was not, however, to be the same as that of the Moghul Emperors in weight and fineness. They proposed that

“9. … the new rupee … be of the gross weight of—

Troy grains	180
Deduct one-twelfth alloy	15
	――
An contain of fine silver troy grs.	165

[pg 10] Such were the proposals put forth by the Court of Directors for the reform of Indian currency.

The choice of a rupee weighing 180 grs. troy and containing 165 grs. pure silver as the unit for the future currency system of India was a well-reasoned choice.

The primary reason for selecting this particular weight for the rupee seems to have been the desire to make it as little of a departure as possible from the existing practice. In their attempts to reduce to some kind of order the disorderly currencies bequeathed to them by the Moghuls by placing them on a bimetallic basis, the Governments of the three Presidencies had already made a great advance by selecting out of the innumerable coins then circulating in the country a species of gold and silver coin as the exclusive media of exchange for their respective territories. The weights and fineness of the coins selected as the principal units of currency, with other particulars, may be noted from the summary table opposite.

To reduce these principal units of the different Presidencies to a single principal unit, the nearest and the least inconvenient magnitude of weight which would at the same time be an integral number was obviously 180 grs., for in no case did it differ from the weights of any of the prevailing units in any marked degree. Besides, it was believed that 180, or rather 179·5511, grs. was the standard weight of the rupee coin originally issued from the Moghul Mints, so that the adoption of it was really a restoration of the old unit and not the introduction of a new one.¹⁶ Another advantage claimed in favour of a unit of 180 grs. was that such a unit of currency would again become what it had ceased to be, the unit of weight also. It was agreed¹⁷ that the unit of weight in India had at all times previously been linked up with that of the principal coin, so that the seer and the manual weights were simply multiples of the rupee, which originally weighed 179·6 grs. troy. Now, if the weight of the [pg 11]

TABLE I

Principal Units of Currency

Issued by the Government of	Territory in which it circulated	Date and Authority of Issue.	Silver Coins			Gold Coins
			Name	Gross Weight Troy Grs.	Pure Contents Troy Grs.	Name	Gross Weight Troy Grs.	Pure Contents Troy Grs.
Bombay	Presidency		Surat Rupee	179·0	164·740	Mohur	179	164·740
Madras	Presidency		Arcot Rupee	176·4	166·477	Star Pagoda	52·40	42·55
Bengal	Bengal, Bihar and Orissa	Regulations XXXV of 1793	Sicca Rupee (19th Sun)	179·66	175·927	Mohur	190·804	189·40
	Cuttock	XII of 1805
	Ceded Provinces	XLV of 1803	Furrakabad Rupee (Lucknow Sicca of the 45th Sun)	173	166·135	—	—	—
	Conquered Provinces
	Benares Provinces	III of 1806	Benares Rupee (Muchleedar)	175	168·875	—	—	—

[pg 12] principal coin to be established was to be different from 180 grs. troy, it was believed there would be an unhappy deviation from the ancient practice which made the weight of the coin the basis of other weights and measures. Besides, a unit of 180 grs. weight was not only suitable from this point of view, but had also in its favour the added convenience of assimilating the Indian with the English units of weight.¹⁸

While these were the reasons in favour¹⁹ of fixing the weight of the principal unit of currency at 180 grs. troy, the project of making it 165 grs. fine was not without its justification. The ruling consideration in selecting 165 grs. as the standard of fineness was, as in the matter of selecting the standard weight, to cause the least possible disturbance in existing arrangements. That this standard of fineness was not very different from those of the silver coins recognised by the different Governments in India as the principal units of their currency, may be seen from the following comparative statement on p. 13.

It will thus be seen that, with the exception of the Sicca and the Benares rupees, the proposed standard of fineness agreed so closely with those of the other rupees that the interest of obtaining a complete uniformity without considerable dislocation overruled all possible objections to its adoption. Another consideration that seemed to have prevailed upon the Court of Directors in selecting 165 grs. [pg 13] as the standard of fineness was that, in conjunction with 180 grs. as the standard weight, the arrangement was calculated to make the rupee eleven-twelfths fine. To determine upon a particular fineness was too technical a matter for the Court of Directors. It was, however, the opinion of the British Committee on Mint and Coinage, appointed in 1803, that²⁰ “one–twelfth alloy and eleven–twelfths fine is by a variety of extensive experiments proved to be the best proportion, or at least as good as any which could have been chosen.” This standard, so authoritatively upheld, the Court desired to incorporate in their new scheme of Indian currency. They therefore desired to make the rupee eleven–twelfths fine. But to do so was also to make the rupee 165 grs. pure—a content which they desired, from the point of view stated above, the rupee to possess.

TABLE II

Deviations of the Proposed Standard of Fineness from that of the Principal Recognized Rupees

Silver Coins recognized as Principal Units and their Fineness.		Standard Fineness of the Proposed Rupee.	More valuable than the Proposed Rupee.		Less valuable than the proposed Rupee.
Name of the Coin.	Its Pure Contents. Troy Grs.		In Grs.	By p.c.	In Grs.	By p.c.
Surat Rupee	164·74	165	—	—	·26	·157
Arcot Rupee	166·477	165	1·477	·887	—	—
Sicca Rupee	175·927	165	10·927	6·211	—	—
Furrukabad R.	166·135	165	1·135	·683	—	—
Benares Rupee	169·251	165	4·251	2·511	—	—

Reviewing the preference of the Court of Directors for monometallism from the vantage-ground of latter-day events, one might be inclined to look upon it as a little too short-sighted. At the time, however, the preference was well founded. One of the first measures the three Presidencies, into which the country was divided for [pg 14] purposes of administration, had adopted on their assuming the government of the country, was to change the parallel standard of the Moghuls into a double standard by establishing a legal ratio of exchange between the mohur, the pagoda, and the rupee. But in none of the Presidencies was the experiment a complete success.

In Bengal²¹ the Government, on June 2, 1766, determined upon the issue of a gold mohur weighing 179·66 grs. troy, and containing 149·92 grs. troy of pure metal, as legal tender at 14 Sicca rupees, to relieve the currency stringency caused largely by its own act of locking up the revenue collections in its treasuries, to the disadvantage of commerce. This was a legal ratio of 16·45 to 1, and as it widely deviated from the market ratio of 14·81 to 1, this attempt to secure a concurrent circulation of the two coins was foredoomed to failure. Owing to the drain of silver on Bengal from China, Madras, and Bombay, the currency stringency grew worse, so much so that another gold mohur was issued by the Government on March 20, 1769, weighing 190·773 grs. troy and containing 190·086 grs. pure gold with a value fixed at 16 Sicca rupees. This was a legal ratio of 14·81 to 1. But, as it was higher than the market ratio of the time both in India (14 to 1) and in Europe (14·61 to 1), this second effort to bring about a concurrent circulation fared no better than the first. So perplexing seemed to be the task of accurate rating that the Government reverted to monometallism by stopping the coinage of gold on December 3, 1788, and when the monetary stringency again compelled it to resume in 1790 the coinage of gold, it preferred to let the mohur and the rupee circulate at their market value without making any attempt to link them by a fixed ratio. It was not until 1793 that a third attempt was made to forge a double standard in Bengal. A new mohur was issued in that year, weighing 190·895 grs. troy and containing 189·4037 grs. of pure gold, and made legal tender at 16 Sicca rupees. This [pg 15] was a ratio of 14·86 to 1, but, as it did not conform to the ratio then prevalent in the market, this third attempt to establish bimetallism in Bengal failed as did those made in 1766 and 1769.

The like endeavours of the Government of Madras²² proved more futile than those of Bengal. The first attempt at bimetallism under the British in that Presidency was made in the year 1749, when 350 Arcot rupees were legally rated at 100 Star pagodas. As compared with the then market ratio this rating involved an under-valuation of the pagoda, the gold coin of the Presidency. The disappearance of the pagoda caused a monetary stringency, and the Government in December, 1750, was obliged to restore it to currency. This it did by adopting the twofold plan of causing an import of gold on Government account, so as to equalise the mint ratio to the market ratio, and of compelling the receipts and payments of Government treasuries to be exclusively in pagodas. The latter device proved of small value; but the former by its magnitude was efficacious enough to ease the situation. Unluckily the ease was only temporary. Between 1756 and 1771 the market ratio of the rupee and the pagoda again underwent a considerable change. In 1756 it was 364 to 100, and in 1768 it was 370 to 100. It was not till after 1768 that the market ratio became equal to the legal ratio fixed in 1749 and remained steady for about twelve years. But the increased imports of silver rendered necessary for the prosecution of the second Mysore war once more disturbed the ratio, which at the close of the war stood at 400 Arcot rupees to 100 Star pagodas. After the end of the war the Government of Madras made another attempt to bring about a concurrent circulation between the rupee and the pagoda. But instead of making the market ratio of 400 to 100 the legal ratio it was led by the then increasing imports of gold into the Presidency to hope that the market ratio would in time rise to that legally established in 1749. In an expectant mood so induced it decided, in 1790, to anticipate the event by fixing the ratio first at 365 to 100. [pg 16] The result was bound to be different from that desired, for it was an under-valuation of the pagoda. But instead of rectifying the error, the Government proceeded to aggravate it by raising the ratio still further to 350 to 100 in 1797, with the effect that the pagoda entirely went out of circulation, and the final attempt at bimetallism thus ended in a miserable failure.

The Government of Bombay seemed better instructed in the mechanics of bimetallism, although that did not help it to overcome the practical difficulties of the system. On the first occasion when bimetallism was introduced in the Presidency²³ the mohur and the rupee were rated at the ratio of 15·70 to 1. But at this ratio the mohur was found to be over-rated, and accordingly, in August, 1774, the Mint Master was directed to coin gold mohur of the fineness of a Venetian and of the weight of the silver rupee. This change brought down the legal ratio to 14·83 to 1, very nearly, though not exactly, to the then prevailing market ratio of 15 to 1, and had nothing untoward happened, bimetallism would have had a greater success in Bombay than it actually had in the other two Presidencies. But this was not to be, for the situation was completely altered by the dishonesty of the Nawab of Surat, who allowed his rupees, which were of the same weight and fineness as the Bombay rupees, to be debased to the extent of 10, 12, and even 15 per cent. This act of debasement could not have had any disturbing effect on the bimetallic system prevalent in the Bombay Presidency had it not been for the fact that the Nawab's (or Surat) rupees were by agreement admitted to circulation in the Company's territories at par with the Bombay rupees. As a result of their being legal tender the Surat rupees, once they were debased, not only drove out the Bombay rupees from circulation, but also the mohur, for as rated to the debased Surat rupees the ratio became unfavourable to gold, and the one chance for a successful bimetallic system vanished away. The question of fixing up a bimetallic [pg 17] ratio between the mohur and the rupee again cropped up when the Government of Bombay permitted the coinage of Surat rupees at its Mint. To have continued the coinage of the gold mohur according to the Regulation of 1774 was out of the question. One Bombay mohur contained 177·38 grs. of pure gold, and 15 Surat rupees of the standard of 1800 contained 247,110 grs. of silver. By this Regulation the proportion of silver to gold would have been (247, 110)/(177·38) i.e. 13·9 to 1. Here the mohur would have under-valued. It was therefore resolved to alter the standard of the mohur to that of the Surat rupee, so as to give a ratio of 14·9 to 1. But as the market ratio was inclined towards 15·5 to 1, the experiment was not altogether a success.

In the light of this experience before them the Court of Directors of the East India Company did well in fixing upon a monometallic standard as the basis of the future currency system of India. The principal object of all currency regulations is that the different units of money should bear a fixed relation of value to one another. Without this fixity of value the currency would be in a state of confusion, and no precaution would be too great against even a temporary disturbance of that fixity. Fixity of value between the various components of the currency is so essential a requisite in a well-regulated monetary system that we need hardly be surprised if the Court of Directors attached special importance to it, as they may well have done, particularly when they were engaged in the task of placing the currency on a sound and permanent footing. Nor can it be said that their choice of monometallism was ill-advised, for it must be admitted that a single standard better guarantees this fixity than does the double standard. Under the former it is spontaneous; under the latter it is forced.

These recommendations of the Court of Directors were left to the different Governments in India to be carried into effect at their discretion as to the time and manner of doing it. But it was some time before steps were taken in consonance with these orders, and even then it was on the realisation of those parts of the program of the Court which pertained [pg 18] to the establishment of a uniform currency that the efforts of the different Governments were first concentrated.

The task of reducing the existing units of currency to that proposed by the Court was first accomplished in Madras. On January 7, 1818, the Government issued a Proclamation²⁴ by which its old units of currency—the Arcot rupee and the Star pagoda—were superseded by new units, a gold rupee and a silver rupee, each weighing 180 grs. troy and containing 165 grs. of fine metal. Madras was followed by Bombay six years later by a Proclamation²⁵ of October 6, 1824, which declared a gold rupee and a silver rupee of the new Madras standard to be the only units of currency in that Presidency. The Government of Bengal had a much bigger problem to handle. It had three different principal units of silver currency to be reduced to the standard proposed by the Court. It commenced its work of reorganisation by a system of elimination and alteration. In 1819, it discontinued²⁶ the coinage of the Benares rupee and substituted in its place the Furrukabad rupee, the weight and fineness of which were altered to 180·234 and 135·215 grs. troy respectively. Apparently this was a step away from the right direction. But even here the purpose of uniformity, so far as fineness was concerned, was discernible, for it made the Furrukabad rupee like the new Madras and Bombay rupees, eleven-twelfths fine. Having got rid of the Benares rupee, the next step was to assimilate the standard of the Furrukabad rupee to that of Madras and Bombay, and this was done in 1833.²⁷

Thus, without abrogating the bimetallic system, substantial steps were taken in realising the ideal unit proposed by the Court, as may be seen from the table on opposite page.

Taking stock of the position as it was at the end of 1833, we find that with the exception of the Sicca rupee and the gold mohur of Bengal, that part of the scheme of the Directors which pertained to the uniformity of coinage was an accomplished fact. Nothing more remained to carry it [pg 19]

TABLE III

Uniformity of Coinage at the end of A.D. 1833

Issued by the Government of	Silver Coins.			Gold Coins.			Legal Ratio
	Denomination.	Weight.	Fineness.	Denomination.	Weight.	Fineness.
Bengal	Sicca Rupee	192	176 or 11⁄12	Mohur	204·710	187·651	1 to 15
	Furrukabad Rupee	180	165 or 11⁄12	—	—	—	—
Bombay	Silver Rupee	180	165 or 11⁄12	Gold Rupee	180	165 or 11⁄12	1 to 15
Madras	Silver Rupee	180	165 or 11⁄12	Gold Rupee	180	165 or 11⁄12	1 to 15

to completion than to discontinue the Sicca rupee and to demonetise gold. At this point, however, arose a conflict between the Court of Directors and the three Governments in India. Considerable reluctance was shown to the demonetisation of gold. The Government of Madras, which was the first to undertake the reform of its currency according to the plan of the Court, not only insisted upon continuing the coinage of gold along with that of the rupee,²⁸ but stoutly refused to deviate from the system of double legal tender at a fixed ratio prevalent in its territories,²⁹ notwithstanding the repeated remonstrance's addressed by the Court.³⁰ The Government of Bengal clung to the bimetallic standard with equal tenacity. Rather than demonetise the gold mohur it took steps to alter its standard³¹ by reducing its pure contents³² from 189·4037 to 187·651 troy [pg 20] grs., so as to re-establish a bimetallic system on the basis of the ratio adopted by Madras in 1818. So great was its adherence to the bimetallic standard that in 1833 it undertook to alter³³ the weight and fineness of the Sicca rupee to 196 grs. troy and 176 grs. fine, probably to rectify a likely divergence between the legal and the market ratios of the mohur to the rupee³⁴.

But in another direction the Government in India wanted to go further than the Court desired. The Court thought a uniform currency (i.e. a currency composed of like but independent units) was all that India needed. Indeed, they had given the Governments to understand that they did not wish for more in the matter of simplification of currency and were perfectly willing to allow the Sicca and the mohur to remain as they were, unassimilated.³⁵ A uniform currency was no doubt a great advance on the order of things such as was left by the successors of the Moghuls. But that was not enough, and the needs of the situation demanded a common currency based on a single unit in place of a uniform currency. Under the system of uniform currency each Presidency coined its own money, and the money coined at the Mints of the other Presidencies was not legal tender in its territories except at the Mint. This monetary independence would not have been very harmful if there had existed also financial independence between the three Presidencies. As a matter of fact, although each Presidency had its own fiscal system, yet they depended upon one another for the finance of their deficits. There was a regular system of “supply” between them, and the surplus in one was being constantly drawn upon to meet the deficits in others. In the absence of a common currency this resource operation was considerably hampered. The difficulties caused by the absence of a common currency in the way of the “supply” operation made themselves felt in two different ways. Not being able to use as legal tender the money of other Presidencies, each was [pg 21] obliged to lock up, to the disadvantage of commerce, large working balances in order to be self-sufficient.³⁶ The very system which imposed the necessity of large balances also rendered relief from other Presidencies less efficacious. For the supply was of necessity in the form of the currency of the Presidency which granted it, and before it could be utilised it had to be re-coined into the currency of the needy Presidency. Besides the loss on re-coinage, such a system obviously involved inconvenience to merchants and embarrassment to the Government.³⁷

At the end of 1833, therefore, the position was that the Court desired to have a uniform currency with a single standard of silver, while the authorities in India wished for a common currency with a bimetallic standard. Notwithstanding these divergent views, the actual state of the currency might have continued as it was without any substantial alteration either way. But the year 1833 saw an important constitutional change in the administrative relations between the three Presidential Governments in India. In that year by an Act of Parliament³⁸ there was set up an Imperial system of administration with a centralisation of all legislative and executive authority over the whole of India. This change in the administrative system, perforce, called forth a change in the prevailing monetary systems. [pg 22] It required local coinages to be replaced by Imperial coinage. In other words, it favoured the cause of a common currency as against that of a mere uniform currency. The authorities in India were not slow to realise the force of events. The Imperial Government set up by Parliament was not content to act the part of the Dewans or agents of the Moghuls, as the British had theretofore done, and did not like that coins should be issued in the name of the defunct Moghul emperors who had ceased to govern. It was anxious to throw off the false garb³⁹ and issue an Imperial coinage in its own name, which being common to the whole of India would convey its common sway. Accordingly, an early opportunity was taken to give effect to this policy. By an Act of the Imperial Government (XVII of 1835) a common currency was introduced for the whole of India, as the sole legal tender. But the Imperial Government went beyond and, as if by way of concession to the Court—for the Court did most vehemently protest against this common currency in so far as it superseded the Sicca rupee⁴⁰—legislated “that no gold coin shall henceforward be a legal tender of payment in any of the territories of the East India Company.”⁴¹

That an Imperial Administration should have been by force of necessity led to the establishment of a common currency for the whole of India is quite conceivable. But it is not clear why it should have abrogated the bimetallic system after having maintained it for so long. Indeed, when it is recalled how the authorities had previously set their faces against the destruction of the bimetallic system, and how careful they were not to allow their coinage reforms to disturb it any more violently than they could help, the provision of the Act demonetising gold was a grim surprise. However, for the sudden volte-face displayed therein, the Currency Act (XVII of 1835) will ever remain memorable in the annals of the Indian history. It marked [pg 23] the culminating-point of a long and arduous process of monetary reform and placed India on a silver monometallic basis with a rupee weighing 180 grs. troy and containing 165 grs. fine as the common currency and sole legal tender throughout the country.

No piece of British India legislation has led to a greater discontent in later years than this Act XVII of 1835. In so far as the Act abrogated the bimetallic system, it has been viewed with a surprising degree of equanimity. Not all its critics, however, are aware⁴² that what the Act primarily decreed was a substitution of bimetallism by monometallism. The commonly entertained view of the Act seems to be that it replaced a gold standard by a silver standard. But even if the truth were more generally known, it would not justify any hostile attitude towards the measure on that score. For what would have been the consequences to India of the gold discoveries of California and Australia in the middle of the nineteenth century if she had preserved her bimetallic system? It is well known how this increase in the production of gold relatively to that of silver led to a divergence in the mint and the market ratios of the two metals after the year 1850. The under-valuation of silver, though not very great, was great enough to confront the bimetallic countries with a serious situation in which the silver currency, including the small change, was rapidly passing out of circulation. The United States⁴³ was obliged by the law of 1853 to reduce the standard of its small silver coins sufficiently to keep them dollar for dollar below their gold value in order to keep them in circulation. France, Belgium, Switzerland, and Italy, which had a uniform currency based on the bimetallic model of the French with reciprocal legal tender⁴⁴ were faced with [pg 24] similar difficulties. Lest a separatist policy on the part of each nation,⁴⁵ to protect their silver currency and particularly the small change, should disrupt the monetary harmony prevailing among them all, they were compelled to meet in a convention, dated November 20, 1865, which required the parties, since collectively called the Latin Union, to lower, in the order to maintain them in circulation, the silver pieces of 2 francs, 1 franc, 50 centimes and 20 centimes from a standard of 900 ⁄ 1000 fine to 835 ⁄ 1000 and to make them subsidiary coins.⁴⁶ It is true that the Government of India also came in for trouble as a result of this disturbance in the relative [pg 25] value of gold and silver, but that trouble was due to its own silly act.⁴⁷ The currency law of 1835 had not closed the Mints to the free coinage of gold, probably because the seignorage on the coinage of gold was a source of revenue which the Government did not like to forego. But as gold was not legal tender, no gold was brought to the Mint for coinage, and the Government revenue from seignorage fell off. To avoid this loss of revenue the Government began to take steps to encourage the coinage of gold. In the first place, it reduced the seignorage⁴⁸ in 1837 from 2 per cent. to 1 per cent. But even this measure was not sufficient to induce people to bring gold to the Mint, and consequently the revenue from seignorage failed to increase. As a further step in the same direction the Government issued a Proclamation on January 13, 1841, authorising the officers in charge of public treasuries to receive the gold coins at the rate of 1 gold mohur equal to 15 silver rupees. For some time no gold was received, as at the rate prescribed by the Proclamation gold was undervalued.⁴⁹ But the Australian and Californian gold discoveries altered the situation entirely. The gold mohur, which was undervalued at Rs. 15, became overvalued, and the Government, which was at one time eager to receive gold, was alarmed at its influx. By adopting the course it did of declaring gold no longer legal tender, and yet undertaking to receive it in liquidation of Government demands, it laid itself under the disadvantage of being open to be embarrassed with a coin which was of no use and must ordinarily have been paid for above its value. Realising its position, it left aside all considerations of augmenting revenue by increased coinage, and promptly issued on December 25, 1852, another Proclamation withdrawing that of 1841. Whether it would not have been better to have escaped the embarrassment by making gold general legal tender than depriving it of its partial legal-tender power is another matter. But, in so far as India was saved the trials and tribulations undergone by the bimetallic countries to preserve the silver part of their [pg 26] currency, the abrogation of bimetallism was by no means a small advantage. For the measure had the virtue of forearming the country against changes which, though not seen at the time, soon made themselves felt.

The abrogation of bimetallism in India accomplished by the Act of 1835, cannot therefore be made a ground for censure. But it is open to argument that a condemnation of bimetallism is not per se a justification of silver monometallism. If it was to be monometallism it might well have been gold monometallism. In fact, the preference for silver monometallism is not a little odd when it is recalled that Lord Liverpool, the advocate of monometallism,⁵⁰ whose doctrines the Court had sought to apply to India, had prescribed gold monometallism for similar currency evils then prevalent in England. That the Court should have deviated from their guide in this particular has naturally excited a great deal of hostile comment as to the propriety of this grave departure.⁵¹ At the outset any appeal to ulterior motives must be baseless, for Lord Liverpool was not a “gold bug,” nor was the Court composed of “silver men.” As a matter of fact, neither of them at all considered the question from the standpoint as to which was a better standard of value, gold or silver. Indeed, in so far as that was at all a consideration worth attending to, the choice of the Court, according to the opinion of the time, was undoubtedly a better one than that of Lord Liverpool. Not only were all the theorists, such as Locke, Harris, and Petty, in favour of silver as the standard of value, but the practice of the whole world was also in favour of silver. No doubt England had placed herself on a gold basis in 1816. But that Act, far from closing the English Mint to the free coinage of silver, left it to be opened by a Royal Proclamation.⁵² The Proclamation, it is true, was never issued, but it is not to be supposed that therefore Englishmen [pg 27] of the time had regarded the question of the standard as a settled issue. The crisis of 1825 showed that the gold standard furnished too narrow a basis for the English currency system to work smoothly, and, in the expert opinion of the time,⁵³ the gold standard, far from being the cause of England's commercial superiority, was rather a hindrance to her prosperity, as it cut her off from the rest of the world, which was mostly on a silver basis. Even the British statesmen of the time had no decided preference for the gold standard. In 1826 Huskisson actually proposed that Government should issue silver certificates of full legal tender.⁵⁴ Even as late as 1844 the question of the standard was far from being settled, for we find Peel in his Memorandum⁵⁵ to the Cabinet discussing the possibility of abandoning the gold standard in favour of the silver or a bimetallic standard without any compunction or predilection one way or the other. The difficulties of fiscal isolation were evidently not so insuperable as to compel a change of the standard, but they were great enough to force Peel to introduce his famous proviso embodying the Huskisson plan in part in the Bank Charter Act of 1844, permitting the issue of notes against silver to the extent of one-fourth of the total issues.⁵⁶ Indeed, so great was the universal faith in the stability of silver that Holland changed in 1847 from what was practically a gold monometallism⁵⁷ to silver monometallism because her statesmen believed that

“it had proved disastrous to the commercial and industrial interests of Holland to have a monetary system identical with that of England, whose financial revulsions, after its adoption [pg 28] of the gold standard, had been more frequent and more severe than in any other country, and whose injurious effects were felt in Holland scarcely less than in England. They maintained that the adoption of the silver standard would prevent England from disturbing the internal trade of Holland by draining off its money during such revulsions and would secure immunity from evils which did not originate in and for which Holland was not responsible.”⁵⁸

But stability was not the ground on which either the Court or Lord Liverpool made their choice of a standard metal to rest. If that had been the case, both probably would have selected silver. As it was, the difference in the choice of the two parties was only superficial. Indeed, the Court differed from Lord Liverpool, not because of any ulterior motives, but because they were both agreed on a fundamental proposition that not stability but popular preference should be the deciding factor in the choice of a standard metal. Their differences proceeded logically from the agreement. For on analysing the composition of the currency it was found that in England it was largely composed of gold and in India it was largely composed of silver. Granting their common premise, it is easy to account why gold was selected for England by Lord Liverpool and silver for India by the Court. Whether the actual composition of the currency is an evidence of popular preference cannot, of course, be so dogmatically asserted as was done by the Court and Lord Liverpool. So far as England is concerned, the interpretation of Lord Liverpool has been questioned by the great economist David Ricardo. In his High Price of Bullion, Ricardo wrote:—

“For many reasons given by Lord Liverpool, it appears proved beyond dispute that gold coin has been for near a century the principal measure of value; but this is, I think, to be attributed to the inaccurate determination of the mint proportions. Gold has been valued too high; no silver can therefore remain in circulation which is of its standard weight. If a new regulation were to take place, and silver be valued too high … gold would then disappear, and silver become the standard money.”⁵⁹ [pg 29]

And it is possible that mint proportions rather than popular preference⁶⁰ could have equally well accounted for the preponderance of silver in India.⁶¹

Whether any other criterion besides popular preference could have led the Court to adopt gold monometallism is a moot question. Suffice it to say that the adoption of silver monometallism, though well supported at the time when the Act was passed, soon after proved to be a measure quite inadequate to the needs of the country. It is noteworthy that just about this time great changes were taking place in the economy of the Indian people. Such a one was a change from kind economy to cash economy. Among the chief causes contributory to this transformation the first place must be given to the British system of revenue and finance. Its effects in shifting Indian society on to a cash nexus have not been sufficiently realized,⁶² although they have been very real. Under the native rulers most payments were in kind. The standing military force kept and regularly paid by the Government was small. The bulk of the troops consisted of a kind of militia furnished by Jageerdars and other landlords, and the troops or retainers of these feudatories were in great measure maintained on the grain, forage, and other supplies furnished by the districts in which they were located. The hereditary revenue and police officers were generally paid by grants of land on tenure of service. Wages of farm servants and labourers were in their turn distributed in grain. Most of its officers being paid in kind, the State collected very little [pg 30] of its taxes in cash. The innovations made by the British in this rude revenue and fiscal system were of the most sweeping character. As territory after territory passed under the sway of the British, the first step taken was to substitute in place of the rural militia of the feudatories a regularly constituted and well-disciplined standing army located at different military stations, paid in cash; in civil employ, as in military, the former revenue and police officers with their followers, who paid themselves by perquisites and other indirect gains received in kind, were replaced by a host of revenue collectors and magistrates with their extensive staff, all paid in current coin. The payments to the army, police, and other officials were not the only payments which the British Government had placed on a money basis. Besides these charges, there were others which were quite unknown to native Governments, such as the “Home Charges” and “Interest on Public Debt,” all on a cash basis. The State, having undertaken to pay in cash, was compelled to realize all its taxes in cash, and as each citizen was bound to pay in cash he in his turn stipulated to receive nothing but cash, so that the entire structure of the society underwent a complete transformation.

Another important change that took place in the economy of the Indian people about this time was the enormous increase of trade. For a considerable period the British tariff policy and the navigation laws had put a virtual check on the expansion of Indian trade. England compelled India to receive her cotton and other manufactures at nearly nominal (2½ per cent.) duties, while at the same time she prohibited the entry of such Indian goods as competed with hers within her territories by prohibitory duties ranging from 50 to 500 per cent. Not only was no reciprocity shown by England to India, but she made a discrimination in favour of her colonies in the case of such goods as competed with theirs. A great agitation was carried on against this unfair treatment,⁶³ and finally Sir Robert Peel admitted [pg 31] Indian produce to the low duties levied by the reformed tariff of 1842. The repeal of the navigation laws gave further impetus to the expansion of Indian commerce. Along with this the demand for Indian produce had also been growing. The Crimean War of 1854 cut off the Russian supplies, the place of which was taken by Indian produce, and the failure of the silk crop in 1853 throughout Europe led to the demand for Asiatic, including Indian, silks.

The effect of these two changes on the currency situation is obvious. Both called forth an increased demand for cash. But cash was the one thing most difficult to obtain. India does not produce precious metals in any considerable quantity. She has had to depend upon her trade for obtaining them. Since the advent of the European Powers, however, the country was not able to draw enough of the precious metals. Owing to the prohibitions on the export of precious metals then prevalent in Europe,⁶⁴ one avenue for obtaining them was closed. But there was little chance of obtaining precious metals from Europe, even in the absence of such prohibition; indeed, precious metals did not flow to India when such prohibitions were withdrawn.⁶⁵ The reason of the check to the inflow of precious metals was well pointed out by Mr. Petrie in his Minute of November, 1799, to the Madras Committee of Reform:⁶⁶ until their territorial acquisitions the Europeans

“purchased the manufactures of India with the metals of Europe: but they were henceforward to make these purchases with gold and silver of India, the revenues supplied the place of foreign bullion and paid the native the price of his industry with his own money. At first this revolution in the principles of commerce was but little felt, but when [pg 32] opulent and extensive dominions were acquired by the English, when the success of war and commercial rivalship had given them so decided a superiority over the other European nations as to engross the whole of the commerce of the East, when a revenue amounting to millions per annum was to be remitted to Europe in the manufactures of the East, then were the effects of this revolution severely felt in every part of India. Deprived of so copious a stream, the river rapidly retired from its banks and ceased to fertilise the adjacent fields with overflowing water.”

The only way open when the prohibitions were withdrawn to obtain precious metals was to send more goods than this amount of tribute, so that the balance might bring them in. This became possible when Peel admitted Indian goods to low tariff, and the country was for the first time able to draw in a sufficient quantity of precious metals to sustain her growing needs. But this ease in the supply of precious metals to serve as currency was short-lived. The difficulties after 1850, however, were not due to any hindrance in the way of India's obtaining the precious metals. Far from being hindered, the export and import of precious metals was entirely free, and India's ability to procure them was equally great. Neither were the difficulties due to any want of precious metals, for, as a matter of fact, the increase in the precious metals after 1850 was far from being small. The difficulty was of India's own making, and was due to her not having based her currency on that precious metal, which it was easy to obtain. The Act of 1835 had placed India on an exclusive silver basis. But, unfortunately, it so happened that after 1850, though the total production of the precious metals had increased, that of silver had not kept pace with the needs of the world, a greater part of which was then on a silver basis, so that as a result of her currency law India found herself in an embarrassing position of an expanding trade with a contracting currency, as is shown on the opposite page.

On the face of it, it seems that there need have been no monetary stringency. The import of silver was large, and [pg 33]

TABLE IV

Trade and Currency⁶⁸

Years	Merchandise.		Treasure. Net Imports of		Total Coinage of		Excess (+) or Defect (―) of Coinage on Net Imports of		Annual Production (in £, 00,000 omitted) of
	Imports. £	Exports. £	Silver. £	Gold. £	Silver. £	Gold. £	Silver. £	Gold. £	Gold.	Silver.
1850–51	11,558,789	18,164,150	2,117,225	1,153,294	3,557,906	123,717	+1,440,681	−1,029,577	8,9	7,8
1851–52	12,240,490	19,879,406	2,865,257	1,267,613	5,170,014	62,553	+2,304,657	−1,205,060	13,5	8,0
1852–53	10,070,863	20,464,633	3,605,024	1,172,301	5,902,648	Nil	+2,297,624	−1,172,301	36,6	8,1
1853–54	11,122,659	19,295,139	2,305,744	1,061,443	5,888,217	145,679	+3,582,473	−915,764	31,1	8,1
1854–55	12,742,671	18,927,222	29,600	731,490	1,890,055	2,676	+1,860,455	−728,814	25,5	8,1
1855–56	13,943,494	23,038,259	8,194,375	2,506,245	7,322,871	167,863	+871,504	−2,338,382	27,0	8,1
1856–57	14,194,587	25,338,451	11,073,247	2,091,214	11,220,014	128,302	+146,767	−1,962,912	29,5	8,2
1857–58	15,277,629	27,456,036	12,218,948	2,783,073	12,655,308	43,783	+436,360	−2,739,290	26,7	8,1
1858–59	21,728,579	29,862,871	7,728,342	4,426,453	6,641,548	132,273	−1,086,794	−4,294,180	24,9	8,1
1859–60	24,265,140	27,960,203	11,147,563	4,284,234	10,753,068	64,307	−394,495	−4,219,927	25,0	8,2

[pg 34] so was the coinage of it. Why then should there have been any stringency at all? The answer to this question is not far to seek. If the amount of silver coined had been retained in circulation it is possible that the stringency could not have arisen. India has long been notoriously the sink of the precious metals. But in interpreting this phenomenon, it is necessary to bear in mind the caution given by Mr. Cassels that

“its silver coinage has not only had to satisfy the requirements of commerce as the medium of exchange, but it has to supply a sufficiency of material to the silversmith and the jeweller. The Mint has been pitted against the smelting-pot, and the coin produced by so much patience and skill by the one has been rapidly reduced into bangles by the other.”⁶⁷

Now it will be seen from the figures given that all the import of silver was coined and used up for currency purposes. Very little or nothing was left over for the industrial and social consumption of the people. That being the case, it is obvious that a large part of the coined silver must have been abstracted from monetary to non-monetary purposes. The hidden source of this monetary stringency thus becomes evident. To men of the time it was as clear as daylight that it was the rate of absorption of currency from monetary to non-monetary purposes that was responsible as to why

“notwithstanding such large importations [to quote from the same authority], the demand for money has so far exceeded … that serious embarrassment has ensued, and business has almost come to a stand from the scarcity of circulating medium. As fast as rupees have been coined they have been taken into the interior and have there disappeared from circulation, either in the Indian substitute for stocking-foot or in the smelting-pot for conversion into bangles.”⁶⁹

The one way open was to have caused such additional imports of silver as would have sufficed both for the monetary [pg 35] as well as the non-monetary needs of the country. But the imports of silver were probably already at their highest. For, as was argued by Mr. Cassels,

“the annual production of silver of the whole world does not exceed ten million sterling. During the last few years, therefore, India alone has annually taken, and to a great extent absorbed, more of the metal than has been produced by the whole world. It is clear that this cannot long continue without producing serious embarrassment. Either the European markets will be unable or unwilling to supply us, or the value of silver will rise to an extravagant extent. Under such circumstances it is not difficult to foresee that the present crisis must continually recur, and the commerce in this country must be periodically, if not permanently, crippled by the scarcity of the circulating medium.”⁷⁰

Had there been any credit media the contraction of currency might not have been felt as severely as it was. But there was no credit money worth the name. The Government issued interest-bearing Treasury notes, which formed a part of the circulating medium of the country. But, apart from being insignificant in amount,⁷¹ these Treasury notes had

“proved a failure, owing, firstly, to the condition that they would not be received in payment of revenue for twelve months; secondly, they would be paid off or received only where issued, so that as the issues were confined to Calcutta, Madras and Bombay, their use and employment for purposes of circulation were limited to those cities … and lastly, because their amounts were too large and their period of running at interest too short.”⁷² [pg 36]

Nor was banking so widely developed as to satisfy the currency needs of commerce. The chief hindrance to its growth was the attitude of the Court. Being itself a commercial body largely dealing in exchange, the Court was averse to the development of banking institutions lest they should prove rivals. As this traditional policy of hostility continued even after the Court had ceased to be a body of merchant princes, banks did not grow with the growth of trade. Indeed, as late as 1856 banks in India numbered few and their issues were small, as shown in the table on opposite page.

The insufficiency of silver and the want of credit currency caused such an embarrassment to trade that there grew up a change in the attitude towards the Currency Act of 1835, and people, for once, began to ask whether, although it was well to have changed from bimetallism to monometallism, it would not have been better to have preferred gold monometallism to silver monometallism. As more and more of gold was imported and coined the stronger grew the demand for giving it a legal status in the existing system of Indian currency.⁷³ All were agreed on the principle of a gold currency: whatever difference there was, was confined to the method of its adoption. The introduction of gold on a bimetallic basis was out of the question, for the Government refused to make what it deemed to be the “hopeless attempt” to fix the value of gold and silver and compel their acceptance at that value.⁷⁴ The projects which the Government was willing to consider⁷⁵ were: (1) to introduce the “sovereign” or some other gold coin and to let it circulate at its market price from day to day as measured in silver; (2) to issue a new gold coin, bearing the exact value of a given number of [pg 37]

TABLE V

Banks in India⁷⁶

Name of the Bank	Year of Establishment	Head Offices	Branches and Agencies	Capital.		Notes in Circulation. £	Specie in Coffers. £	Bills under Discount. £
				Subscribed. £	Paid up. £
Bank of Bengal	1809	Calcutta		1,070,000	1,070,000	1,714,771	851,964	125,251
Bank of Madras	1843	Madras		300,000	300,000	123,719	139,960	59,871
Bank of Bombay	1840	Bombay		522,000	522,000	571,089	240,073	195,836
Oriental Bank	1851			1,215,000	1,215,000	199,279	1,146,529	2,918,399
Agra and U.P.	1833	Calcutta	Agra, Madras, Lahore, Canton, and London	700,000	700,000	—	74,362	—
Bank	1844	Calcutta	Bombay, Simla, Mussowri and Agra. Agencies in Delhi and Cawnpore	220,560	220,000	—	—	—
London & Eastern Bank	1854			250,000	—	325,000	—	—
Commercial Bank	1854	Bombay	Agents in London, Calcutta, Canton, & Shanghai	1,000,000	456,000	—	—	—
Delhi Bank	1844	Delhi	Agents in London, Calcutta, Bombay and Madras	—	180,000	—	—	—
Simla Bank	1844			—	63,850	—	—	—
Dacca Bank	1846			30,000	—	—	—	—
Mercantile Bank		Bombay	London, Calcutta, Colombo, Kandy, Canton, and Shanghai	500,000	328,826	777,156	77,239	109,547
India, China and Australian Bank				had not commenced business

[pg 38] rupees, and make it a legal tender for a limited period, when it might be readjusted and again valued, and made a legal tender for a similar period at the new rate; (3) to introduce the English sovereign as a legal tender for Rs. 10, but limited in legal tender to the amount of Rs. 20 or two sovereigns; or (4) to substitute a gold standard for the silver standard.

Of these projects the first three were evidently unsafe as currency expedients. Fixity of value between the various components of the currency is an essential requisite in a well-regulated monetary system. Each coin must define a fixed value, in terms of the others realizable by the most untutored intellect. When it ceases to do so it becomes a mere commodity, the value of which fluctuates with the fluctuations of the market. This criterion ruled out the first two projects. To have introduced a coin as money, the value of which could not be vouched for—as would have been the case under the first project—from one day to another, apart from the trouble of computing and ascertaining the fluctuations, would have been a source of such embarrassment that the Government, it must be said, acted wisely in not adopting it. There was no saving grace in the second project to recommend its adoption in preference to the first. If it had been adopted the result would have been that during the period that a rate was fixed, gold would have been forced into circulation supposing that its market value was lower, and at the end of the year, if it was known that the rate would be revised and the value of the coin be reduced in conformity with the fall of gold, a general struggle to get rid of the overrated gold coin and shift the inevitable loss to the shoulders of others would have certainly ensued. The third was a somewhat strange proposal. It is possible with a low-priced metal to strike coins of less than full value for the purposes of small payments and limit their tender. But this is not possible with a high-priced metal, the raison d'être of which is to facilitate large transactions. The objections to the plan could hardly be concealed. So long as gold was undervalued it would not circulate at all. But once it became overvalued owing to changes in [pg 39] the market ratio the rupee would go out of circulation, and shopkeepers and traders would remain possessed of a coin which would be of no use in liquidating large transactions.

The only project free from these faults was the adoption of a gold standard, with silver as a subsidiary currency. The strongest argument the Government could oppose to this demand was that “in a country where all obligations have been contracted to be paid in silver, to make a law by which they could forcibly be paid in anything else would simply be to defraud the creditor for the advantage of the debtor, and to break public faith.”⁷⁷ However sound the argument might have been, it was hopelessly inadequate to meet the growing demand to place the Indian currency on an expanding basis. Indeed, it cannot be said that the Government was really serious in its opposition to a gold currency. For the strength of its position it relied not so much on the soundness of its arguments against gold, but on its discovery that a better solution than a gold currency existed at hand. If what was wanted was a supplement to the existing currency, then the remedy proposed by the Government was unassailable. Gold would have been uneconomical and inconvenient. Silver backed by paper would make the currency economical, convenient, and expansive. Indeed, the advantages were so much in favour of the official alternative that this first attempt against the silver standard resulted not in the establishment of a gold standard, but in the introduction of a Government paper currency to supplement the existing silver standard.

None the less, the desire for a gold standard on the part of the people was too great to be altogether ignored, though the demand for it was supposed to have been met by the alternative measure. The paper currency, as originally conceived by Mr. Wilson, was a complete counterblast to the gold agitation. But his successor, Mr. Laing, differed from him in what he regarded as the “barbarous” exclusion of gold from Indian currency. He therefore introduced two important provisos in the original Bill, when the task of [pg 40] carrying it through fell upon him, owing to the untimely death of Mr. Wilson. One was to raise the lowest denomination of notes from Rs. 5 to Rs. 20. The other was

“to authorize the Governor-General in Council from time to time to direct by order to be published in the Gazettes of Calcutta, Madras and Bombay, that notes to an extent not exceeding one-fourth of the total amount of issues represented by coin and bullion … be issued in exchange for gold coin … or bullion computed at rates to be fixed by such order …”

The Act which afterwards embodied the Bill adopted the second proviso in toto, and the first after being modified so as to fix Rs. 10 as the lowest denomination of notes to be issued. Although its general tenor is clear the immediate aim of the second proviso does not become quite clear from a perusal of the official papers. The Select Committee on the Paper Currency Bill seems to have held that the proviso was innocuous if not good. It thought

“that on special occasions and in particular transactions it might be a great advantage to the mercantile community to know that gold could be made available as money at a fixed rate. If, on the other hand, at the rate fixed gold did not enter into circulation it would prove that silver, with a secure and convertible paper currency, gave perfect confidence and answered all the wants of the trade and of the community, and the enactment would remain a dead letter and be perfectly harmless.”

But there is no doubt that Mr. Laing looked upon it as an easy means of making a transition to the gold standard. In his Minute on Currency and Banking, dated May 7, 1862, he wrote:

“The object of this proviso was simply to leave the door open for cautious and tentative experiments with regard to the future use of gold. The importation of gold already exists and is increasing, and the metal is much appreciated by the native population as generally to command a premium. … Thus, after a time, if the use of gold becomes more general, and its value more fixed, some further step might be taken.” [pg 41]

And such seems to have been the impression of the Secretary of State at the time, for he understood the force of the recommendation in favour of issuing notes against gold was that it would “effectually contribute to the introduction of a gold currency in India.”⁷⁸

But whether conceived as a relief to the mercantile community or as an avenue for introducing a gold currency the proviso was not put into effect. The Secretary of State objected⁷⁹ to any action being taken with regard thereto. In the meantime the paper currency did not prove the panacea it was avowed to be. The extent it reached and the economy it effected were comparatively insignificant.

TABLE VI

Extent and Economy of Paper Currency

Presidencies.	Bullion.	Coin.	Government Securities.	Value of Notes in Circulation.
Calcutta on Oct. 31, 1863	—	1,84,55,922	1,10,44,078	2,95,00,000
Madras on Oct. 31, 1863	—	73,00,000	—	73,00,000
Bombay on Jan. 4, 1864	1,17,00,000	1,19,00,000	—	2,36,00,000
Total	1,17,00,000	3,76,55,022	1,1,44,078	6,04,00,000

As was pointed out by Mr. Cassels⁸⁰ the currency notes, after three years, had been taken only to the extent of about 6 per cent. of the whole metallic currency, which was then estimated by Mr. Wilson to be £100,000,000 in sterling, and that they had actually fulfilled their primary object of releasing the reproductive capital of the country only to [pg 42] the extent of a million sterling or 1 per cent. of the whole. On the other hand, the demand for currency grew apace. Owing to the demand for Indian cotton in the Liverpool market to take the place of American cotton, the export of which was stopped during the Civil War, the growing foreign trade assumed enormous proportions. And as the paper currency gave no relief the entire stress fell upon silver. The production of silver, however, was not increasing much faster than it did previously, and its absorption by India had not slackened. The inadequacy of a currency medium therefore continued to be felt as acutely as before, notwithstanding the introduction of a paper currency. This inadequacy was made good by increased imports of gold. Not only was gold imported in large quantities, but was employed for monetary purposes, although it was not legal tender. The fact was brought to the notice of the Government of India by the Bombay Chamber of Commerce⁸¹ in a memorial praying for the introduction of a gold currency in India, in which it was pointed out

“that there is an increasing tendency to the creation of a gold ingot currency, by the natives of this country, as a rude remedy for the defects of the existing silver one,”

and

“that gold bars, stamped with the mark of Bombay banks, are for this purpose circulated in several parts of the country.”

This led to an agitation for requiring the Government to give effect to the proviso in the Paper Currency Act,⁸² and the movement assumed such dimensions that it forced the hands of the Government. On this occasion the plan for effecting the change was boldly conceived. Sir Charles Trevelyan [pg 43]

TABLE VII

Trade and Currency⁸³

Years	Merchandise.		Treasure. Net Imports of		Total Coinage of		Excess (+) or Defect (-) of Coinage on Net Imports of		Annual Production (in £, 00,000 omitted) of
	Imports. £	Exports. £	Silver. £	Gold. £	Silver. £	Gold. £	Silver. £	Gold. £	Gold. £	Silver. £
1860–61	23,493,716	32,970,605	5,328,009	4,232,569	5,297,150	65,038	−30,859	−4,167,531	23,9	8,2
1861–62	22,320,432	36,317,042	9,086,456	5,184,425	7,470,030	58,667	−1,616,426	−5,125,758	22,8	8,5
1862–63	22,632,384	47,859,645	12,550,155	6,848,156	9,355,405	130,666	−3,194,750	−6,717,490	21,6	9,0
1863–64	27,145,590	65,625,449	12,796,717	8,898,306	11,556,720	54,354	−1,239,997	−8,843,952	21,4	9,8
1864–65	28,150,923	68,027,016	10,078,798	9,839,964	10,911,322	95,672	+832,524	−9,744,292	22,6	10,3
1865–66	29,599,228	65,491,123	18,668,673	5,724,476	14,639,353	17,665	−4,029,320	−5,706,811	24,0	10,4
1866–67	29,038,715	41,859,994	6,963,073	3,842,328	6,183,113	27,725	−779,960	−3,814,603	24,2	10,1
1867–68	35,705,783	50,874,056	5,593,961	4,609,466	4,385,080	21,534	−1,208,881	−4,587,932	22,8	10,8
1868–69	35,990,142	53,062,165	8,601,022	5,159,352	4,269,305	25,156	−4,331,717	−5,134,196	22,0	10,0
1869–70	32,927,520	52,471,376	7,320,337	5,592,016	7,510,480	78,510	+190,143	−5,513,506	21,2	9,5

[pg 44] saw through the weak point of the proviso on which the Government was called upon to act. He argued that the currency notes were payable only in the current coin of the country, which in India was the silver rupee, and to hold a portion of the reserve in gold which could not be tendered in payment of the notes was seriously to endanger their convertibility in times of political distrust or commercial panic.⁸⁴ He therefore ventured beyond the scope of the agitation, and pronounced that instead of allowing gold a back-door entry into the currency system it ought to be made the standard of value in India. He did not agree with Mr. Wilson that the substitution of gold for the silver standard would be “to break faith with the creditor.” Nor was he much deterred by the fact that before the silver currency could be reduced to a subsidiary position the introduction of gold in India would give rise to a double standard for the time being; for he argued that “all nations must pass through a transition stage of a double standard before they arrive at a single standard.” Accordingly he proposed that (1) sovereigns and half-sovereigns of British or Australian standard should be legal tender in India, at the rate of one sovereign for Rs. 10; and that (2) Government currency notes should be exchangeable either for rupees or sovereigns at the rate of one sovereign for Rs. 10, but that they should not be exchangeable for bullion.

His proposals were accepted by the Government of India and were communicated to the Secretary of State⁸⁵ for his sanction. But the Secretary of State, impatient and intolerant of any deviation from a monometallic system, whittled down the whole project with scant courtesy. His [pg 45] reply⁸⁶ is a grotesque piece of reasoning and terribly shallow. He was unwilling to allow the measure, because he felt satisfied that the rate of Rs. 10 to a sovereign underrated the sovereign too much to permit its circulation. Here he was on solid ground. The cost of producing a sovereign at a Mint in India was estimated⁸⁷ at the time to be Rs. 10–4–8; while the cost of importing it to Calcutta from England was estimated at Rs. 10–4–10, and from Australia at Rs. 10–2–9. Whichever was the proper rate, it was certain that sovereigns could not circulate at the rate of Rs. 10 to 1. It was a pity that Sir Charles Trevelyan did not propose a higher ratio⁸⁸ so as to make the circulation of the sovereign an assured event. But the Secretary of State would have been averse to the measure just the same even if the ratio had been favourable to the sovereign. To the Secretary of State, the measure, based as it was on an unfavourable ratio, was useless. But if based on a favourable ratio it was none the less pernicious, for it portended the possibility of what he considered as the most vicious system of double standard, however temporary it might have been. The mere contingency of giving rise to a bimetallic system was enough to frighten the Secretary of State into opposition to the whole measure, for he refused to admit that “it may be for the public advantage to pass through a period of double standard in order to change the basis of the currency from silver to gold.”

The only concession that the Secretary of State was willing to make was to permit “that gold coin should be received [pg 46] into public treasuries at a rate to be fixed by Government and publicly announced by Proclamation” without making it a general legal tender in India. It will be recalled that this was a revival of that foolish measure which was abandoned in 1852 for having embarrassed the Government. To offer to receive coin which you cannot pay back is to court trouble, and it was to obviate the too-well-known danger inherent in the project that this more complete measure was proposed. But the currency stringency was so great that the Government of India, rather than obstinately cling to their view, consented to avail themselves of the suggestion of the Secretary of State, and issued a Government Notification in November, 1864, which proclaimed that

“sovereigns and half-sovereigns coined at any authorized Royal Mint in England or Australia of current weight, shall until further notice be received in all the Treasuries of British India and its dependencies in payment of sums due to Government, as the equivalent of 10 and 5 Rs. respectively; and that such sovereigns and half-sovereigns shall, whenever available at any Government Treasury, be paid at the same rates to any person willing to receive them in payment of claims against the Government.”

The real par, however, was somewhat above Rs. 10 to the sovereign,⁸⁹ and the notification was therefore inoperative. The currency situation, on the other hand, continued to be as acute as ever, and the Government of India was again moved in 1866 by the Bengal Chamber of Commerce to take steps to make the circulation of gold effective. This time the Chamber insisted on the institution of a Commission of Inquiry “as to the expediency of introducing gold into the monetary system of India.” But the Government of India held⁹⁰ that “instead of a gold a paper currency has been introduced, in the expectation that it would prove a more convenient and acceptable circulating medium then either [pg 47] of the precious metals,” and consequently “it must be shown that paper has not proved and is not likely to prove a circulating medium adequate to the wants and suitable to the habits of the country before an endeavour is made to introduce gold in supersession of, or in addition to, paper.” A commission was therefore appointed to inquire into the “operation of the existing currency arrangements which were established under Act XIX of 1861,” and to report as to “what may be the advantage, as based on expediency, of the introduction of the legal tender of gold into India, in addition to that of silver.” After an exhaustive investigation the Commission came to the conclusion⁹¹ that owing to several causes the paper currency had failed to establish itself among the circulating media of the country, but that gold was finding a larger place in the transactions of the people. The Commission ended by urging upon the Government “to cause a legal tender of gold to be a part of the currency arrangements of India.” Now it was the turn of the Government to give effect to the recommendation. But, curiously enough, it did not go to the extent of adopting the recommendation of the Commission which it had itself appointed. Instead of making gold legal tender, as advised by the Commission, the only action the Government took was to issue another Notification on October 28, 1868, which simply altered the rate of the sovereign to Rs. 10–8 without doing anything further to avoid the evil consequence attendant upon that one-sided measure. Fortunately for the Government, even this correction of the rate did not induce any flow of gold into the circulation of the country. The currency troubles had by then subsided, and as no new pressure was exerted upon the Government this proved the last of two abortive attempts the Government made to introduce gold into India.

For the time being the problem was solved by the natural course of events. But, as subsequent events showed, the change to a gold standard would have been better for India⁹² [pg 48] and would have been welcomed⁹³ in the interest of Europe, which was then suffering from high prices due to the superfluity of gold. At this particular juncture the Government of India was really at the crossing of ways, and could have averted the misfortunes that were to befall it and its people if it had sided with the forces of change and replaced the silver standard by a gold standard, as it could most easily have done. That those in charge of Indian affairs should have thrown the weight of their authority against the change was no dishonest act deserving of reproach,⁹⁴ but it does furnish one more illustration of those disastrous human ways which often lead people to regard the situation in which they live as most secure just when it is most precarious. So secure did they feel about the currency situation that in 1870, when the Mint Law came to be revised and consolidated, they were content, as though nothing had happened or was likely to happen, to allow the silver standard of 1835 to continue pure and unsullied by any admixture of gold.⁹⁵

Alas! those who then said⁹⁶ that they were not called upon to take more than a “juridical” view of the Indian currency question knew very little what was in store for them. [pg 49]

CHAPTER II

It is clear how the clear how the evolutionary process with respect to the Indian currency culminated in the establishment of a silver standard and how the agitation for a gold currency ended in the silver standard being supplemented by a paper currency. Before proceeding to inquire into the working of such a mixed system, it would be useful to review briefly the nature of its framework.

The metallic part of it was regulated by Act XXIII of 1870, The coins authorized and legalized thereunder were as shown on p. 50. [pg 50]

TABLE VIII

Denomination of Coins issued by the Mint.	Gross Wt. Troy Grs.	Remedy in Weight	Fineness Troy Grs.	Remedy in Fineness.	Legal-tender power
I. Gold Coins (a)
(i) Mohur	180	2 ⁄ 1000ths	165	2 ⁄ 1000ths	Not Legal Tender at all.
(ii) Third of a Mohur	60	2 ⁄ 1000ths	65	2 ⁄ 1000ths
(iii) Two-thirds of a Mohur	120	2 ⁄ 1000ths	110	2 ⁄ 1000ths
(iv) Double Mohur	360	2 ⁄ 1000ths	330	2 ⁄ 1000ths
II. Silver Coins (b)
(i) Rupee	180	5 ⁄ 1000ths	165	2 ⁄ 1000ths	Unlimited Legal Tender
(ii) Half-rupee	90	5 ⁄ 1000ths	82·5	2 ⁄ 1000ths
(iii) Quarter-rupee	45	7 ⁄ 1000ths	41·25	3 ⁄ 1000ths	Legal Tender for Fractions of a Rupee only.
(iv) Eighth of a Rupee	22·5	10 ⁄ 1000ths	20·625	3 ⁄ 1000ths
III. Copper Coins (c)
(i) Pice	100	1 ⁄ 40th	—	—	Legal Tender for (1)/(64)th part of a Rupee.
(ii) Double Pice	200	1 ⁄ 40th	—	—	Legal Tender for (1)/(32)nd part of a Rupee.
(iii) Half-pice	50	1 ⁄ 40th	—	—	Legal Tender for (1)/(128)th part of a Rupee.
(iv) Pie	33·3	1 ⁄ 40th	—	—	Legal Tender for (1)/(192)nd part of a Rupee.

The Act made no innovations either in regard to the number of coins issued by the Mints or their legal-tender powers. Identical though it was with the earlier enactments in the matter of coins,⁹⁷ its juridical provisions were designed to perfect the monetary law of the country as had never been done before. The former Acts which it repealed were [pg 51] very sparing in their recognition of the principle of mint “remedy” or “toleration,” as it is called. The point has been largely deemed to be one of mere mint technique. That is so; but it is not without its monetary significance. When the precious metals were current by weight the question of a mint toleration could not possibly have arisen, for it was open to every one to ascertain the same by weighing the value of his return. But since the invention of coinage, when currency came to be by tale, every one has trusted that the coins contained the value they were certified to contain. The actual value of the coin cannot, however, always be in exact agreement with its certified value. Such differences are bound to exist, and even with all the improvements in the art of coinage it would be difficult to avoid them. What matters is the extent of the deviation from the true mint standard. The mint laws of all countries, therefore, contain provisions which declare that coins shall not be legal tender at their certified value if they err from their legal standard beyond a certain margin. Indeed, to make coins legal tender without prescribing a limit to their toleration is to open a way to fraud. In so far as the Act laid down a limit of toleration to the coins it authorized to be issued from the Mint, it was a salutary measure. It is to be regretted, however, that the Act instituted no machinery with which to ascertain that the coinage conformed to the law.⁹⁸ Another important improvement made by the Act was the recognition of the principle of free coinage. The principle, though it has not received the attention it deserves, is the very basis of a sound currency in that it has an important bearing on the cardinal question of the quantity of currency necessary [pg 52] for the transactions of the community. Two ways may be said to be open by which this quantity can be regulated. One way is to close the Mint and to leave it to the discretion of the Government to manipulate the currency to suit the needs. The other is to keep the Mint open and to leave it to the self-interest of individuals to determine the amount of currency they require. In the absence of unfailing tests to guide the exercise of discretion necessary in the case of closed Mints, the principle of open Mints has been agreed upon as the superior of the two plans. When every individual can obtain coin for bullion and convert coin into bullion, as would be the case under open Mints, the quantity is automatically regulated. If the increasing demands of commerce require a large amount of circulating medium, it is for the interest of the community to divert a larger quantity of its capital for this purpose; if, on the contrary, the state of trade is such as to require less, a portion of the coin is withdrawn, and applied as any other commodity for purposes other than those of currency. Because the Act of 1870 expressly recognized the principle of open Mint, it is not to be supposed that the Mints were closed before that date. As a matter of fact they were open to the free coinage of both gold and silver, although the latter alone was legal tender. But, strange as it may seem, none of the earlier Acts contained a word as to the obligation of the Mint Master to coin all the metal presented to him—a condition which is of the essence of the open mint system. The provisions of the Act on this point are unmistakable. It required:—

“Section 19. Subject to the Mint-rules for the time being in force, the Mint Master shall receive all gold and silver bullion and coin brought to the Mint:

“Provided that such bullion and coin be fit for coinage;

“Provided also that the quantity so brought at one time by one person is not less, in case of gold, than fifty tolas, and, in the case of silver, than one thousand tolas.

“Section 20. A duty shall be levied at the rate of one rupee per cent. at the Mint on the produce of all gold bullion and on all gold coin brought for coinage to the Mint in accordance with the said Mint-rules. [pg 53]

“Section 21. All silver bullion or coin brought for coinage to the Mint, in accordance with the said Mint-rules, shall be subject to a duty at the rate of 2 per cent. on the produce of such bullion or coin, and the amount of such duty shall be deducted from the return to be made to the proprietor.

“Section 22. A charge of one-fourth per mille on gold bullion and coin, and of one per mille on silver bullion and coin, shall also be levied for melting or cutting such bullion and coin so as to render the same fit for receipt into the Mint.

“Section 23. All gold and silver bullion and coin brought to the Mint for coinage, and which is inferior to the standard fineness prescribed by this Act, or which, from brittleness or other cause, is unfit for coinage, shall, in case it is refined, be subject, in addition to the duty and charge aforesaid, to such charge on account of the loss and expense of refining as the Governor-General in Council prescribes in this behalf.

“Section 24. The Mint Master, on the delivery of gold or silver bullion or coin into the Mint for coinage, shall grant to the proprietor a receipt which shall entitle him to a certificate from the Assay Master for the net produce of such bullion or coin payable at the General Treasury.

“Section 25. For all gold bullion and coin, in respect of which the Assay Master has granted a certificate, payment shall be made, as nearly as may be, in gold coins coined under this Act or Act No. XVII of 1835; and the balance (if any) due to the proprietor shall be paid in silver, or in silver and copper, coins current in British India.”

In the matter of paper currency the Government, it is to be noted, did not proceed upon the principle of freedom of issue which then obtained in the country. There prevails the erroneous view that before the introduction of the Government paper currency the right of note issue was confined to the three Presidency banks in India. As a matter of fact there existed in India what is called the free banking system, in which every bank was at liberty to issue its notes. It is true that notes of the Presidency banks enjoyed a status slightly superior to that enjoyed by the notes of other banks in that they were received by the Government to some extent in payment of revenue⁹⁹—a privilege for which the Presidency banks had to submit to a stringent legislative control [pg 54] on their business¹⁰⁰ from which other banks whose issues were not so privileged were immune. But this disadvantage was not sufficient to discourage other banks from indulging in the right of issue which was left open to them by law. However, this freedom of issue does not seem to have been exercised by any of the banks on any very large scale, not even by the Presidency Banks,¹⁰¹ and was taken away from all in 1861,¹⁰² when there was established a national issue for [pg 55] the whole of India entrusted to the management of a Government Department called the Department of Paper Currency. But if private interest was not allowed to play the same part in determining the quantity of paper currency as was the case with regard to metallic currency, neither was any discretion left to the Government Department in the regulation of the paper currency. The Department of Paper Currency had no more discretion in the matter of paper currency than the Mint Master had in the matter of metallic currency.

The Department's duty was confined by law¹⁰³ to the issue of notes in exchange for the amount thereof: (1) in current silver coin of the Government of India; (2) in standard silver bullion or foreign silver coin computed according to standard at the rate of 979 rupees per 1,000 tolas of standard silver fit for coinage; (3) in other notes of the Government of India, payable to bearer on demand of other amounts issued within the same circle; and (4) in gold coin of the Government of India, or for foreign gold coin or bullion, computed at such ratio and according to such rules and conditions as may be fixed by the Governor-General, provided that the notes issued against gold did not exceed one-fourth of the total amount of issues represented by coin and bullion. The whole of this amount was required by law to be retained as a reserve for the payment of notes issued with the exception of a fixed amount which was invested in Government securities, the interest thereon being the only source of profit to the Government. The limit to the sum to be so invested was governed “by the lowest amount to be estimated to which, according to all reasonable experience, the paper currency might be expected to fall.”¹⁰⁴ Estimating on this basis, the limit to the investment portion was fixed at 4 crores in 1861,¹⁰⁵ at 6 crores in 1871,¹⁰⁶ and at 8 crores in 1890.¹⁰⁷ But notwithstanding the growing increase in the investment portion, never was the fiduciary issue based [pg 56] thereon so great¹⁰⁸ as to abrogate the essential principle of the Indian Paper Currency Law, the object of which was to so regulate the volume of paper currency that it should always preserve its value by contracting and expanding in the same manner and to the same extent as its metallic counterpart.

Such was the organization of the mixed currency that existed in India before it underwent a profound change during the closing years of the nineteenth century. Though of a mixed character, the paper portion formed a comparatively small part of the total. The principal reasons why the paper currency did not assume a large proportion are to be found in the organization of the paper currency itself.¹⁰⁹ One such reason was that the lowest denomination of the notes was too large to displace the metallic currency. By the law of 1861 the denomination of notes ranged upwards from Rs. 10 as the lowest to Rs. 20, 50, 100, 500, and 1,000. In a country where the average range of transactions did not exceed R. 1 and were as low as 1 anna or even lower, it is impossible to expect that paper currency could to any great extent figure in the dealings of the people. Even Rs. 5 notes, the issue of which was first sanctioned in the year 1871,¹¹⁰ were not low enough to penetrate into the economic life of the people. The other impediment to the increase of [pg 57] paper currency was the difficulty of encashing notes. One of the infelicitous incidents of the paper currency in India consisted in the fact that they were made legal tender everywhere within a circle, but encashable only at the office of issue. For such a peculiar organization of the paper currency in India, what was largely responsible was the prevalence of internal exchange¹¹¹ in the country. It raised a serious problem for the Government to cope with. If notes were to be made universally encashable it was feared that merchants, instead of using notes as currency, might use them as remittance on different centres to avoid internal exchange, and the Government be obliged to move funds between different centres to and fro lest it should have to suspend cash payments. To undertake resource operations on such a vast scale between such distant centres when facilities for quick transport were so few was obviously impossible,¹¹² and the Government therefore decided to curtail the encashment facilities of the notes it [pg 58] issued. For the purposes of the paper currency the Government divided the country into a number of circles of issue, and each currency circle was further subdivided into sub-circles,¹¹³ and the notes issued bore on their face the name of the circle or sub-circle from which they originated. Notes issued from any agency of issue situated in the territory comprised within a circle of issue were not legal tender in the territory of any other currency circle, nor were they encashable outside their own circle. Nay more, the notes issued from sub-circles subject to the same chief circle were legal tender in one another's territory, but were not encashable except at their office of issue or at the issue office of their chief circle. The sub-circle notes could thus be cashed at two places, but the notes of the issue office of the chief circle, though legal tender in the entire territory covered by it, were encashable nowhere except at its own counter, not even at any of its own sub-circles.¹¹⁴ This want of universal encashability, though it saved the Government from the possibility of embarrassment, proved so great a hindrance to the popularity of the notes that it may be doubted whether the paper currency could have made a progress greater than it did even if the lowest denomination of the notes had been lower than it actually was.

It must, however, be borne in mind that it was not the intention of the Indian Legislature to make the Indian currency as economical¹¹⁵ as was desired by the Executive Government. The Legislature was no doubt appealed to by the original author of the paper currency to turn India into a new Peru, where as much currency could be had with as little cost,¹¹⁶ but the Legislature showed a rather prudent reserve on the matter of aiding the consummation of such a [pg 59] policy. As the centres of encashment were so few, and the area included within each so large as to separate the furthest point in a circle by a distance of about 700 miles from the centre of encashment of the circle, it viewed with dread the authorizing of notes of smaller denomination which the poor could not refuse and yet could not cash.¹¹⁷ Besides the hardship involved in the want of encashability in the notes, the Legislature feared they would prove a “fugitive treasure” in the hands of the Indian peasant. Not being able to preserve them from rain and ants, he might have had to pay a heavy discount to be rid of the notes he could have been forced to accept.¹¹⁸ So opposed was the Legislature to the economizing clauses of the Paper Currency Bill as contrived to drive out metallic currency that it gave the Government an option to choose between legal-tender notes but of higher denomination and lower-denomination notes but of no legal-tender power.¹¹⁹ And as the Government chose to have legal-tender notes, the Legislature in its turn insisted on their being of higher denomination. At first it adhered to notes of Rs. 20 as the lowest denomination, though it later on yielded to bring it down to 10, which was the lowest limit it could tolerate in 1861. Not till ten years after that did the Legislature consent to the issue of Rs. 5 notes, and that, too, only when the Government had promised to give extra legal facilities for their encashment.¹²⁰ On the whole, the desire of the Indian Legislature was to make the Indian currency safer, rather than economical, and such it undoubtedly was. [pg 60]

How did the currency system thus constituted work? Stability of value is one of the prime requisites of a good currency system. But if we judge the Indian currency from this point of view we find that there existed such variations in its value that it is difficult to escape the conclusion that the system was a failure.

Taking the rate of discount as an evidence of the adequacy of currency for internal commerce, it was the opinion of such a high financial authority as Mr. Van Den Berg that the unexpected contortions and sudden transitions in the Indian money market were unparalleled in the annals of any other money market in any other part of the world.¹²¹ India is pre-eminently a country subject to seasonal swings.¹²² Mid-summer [pg 61] is naturally a period of diminished activity, while autumn brings renewed vigour in all activities of social and economic life. Not production alone is affected by seasons. On the side of consumption Indian social life is also subject to seasonal variations. There are marriage seasons, holiday seasons, and holy seasons. Even distribution has assumed in India quite a seasonal character. The practice of paying rents, wages, dividends, and settling accounts at stated intervals has been gaining ground as a result of contact with Western economic organization. All these generate a kind of rhythm in the social demand for money, rising at certain periods of the year and falling at others. Having regard to the seasonal character of the economic and social life, the fluctuations caused by the discount rate soaring high during busy months when it should have been low enough to liquidate the transactions, and falling low during slack months when it should have been high enough to prevent the market from being demoralized, are unavoidable. But what made the contortions of the Indian money market so obnoxious was the circumstance that the seasonal fluctuations in the discount rate were so abnormal.¹²³

The explanation for such a market phenomenon is to be sought in the irregularity of the money supply of the country. In order that money may be had at a uniform price, its supply should be regulated according to the variations in the demand for it. It is well to recognize that the demand for money is never fixed. But it will avail nothing until it is realized that the changes in the demand for money [pg 62] which take place from year to year with the growth of population, trade, etc., belong essentially to a different category from the fluctuations in the demand for money which occur within the course of a year owing to seasonal influences. In any well-regulated currency it is necessary to distinguish these two categories of changes in monetary demand, the one requiring steadiness and expansibility and the other elasticity. On a comparative view it seems more than plausible that a metallic money is as especially adapted to furnish this element of steadiness and stability as paper money is to furnish that of elasticity. Indeed, so appropriate seem to be their respective functions that it has been insisted¹²⁴ that in an ideal system these two forms of money cannot interchange their functions without making the currency burdensome or dangerous. The proof of the soundness of this view, it may be said, is found in the fact that, excluding the small transactions which take place by direct barter, the purchasing medium of any commercially advanced country is always a compound of money and credit.

On the face of it the Indian currency is also a compound of money and credit, and as such it may be supposed that it contained provisions for expansibility as well as elasticity. But when we come to analyse it we find that it makes no provision whatever for elasticity. Far from allowing the credit part of it to expand and contract with the seasonal demands, the Paper Currency Act placed a rigid limit upon the volume of its issue regardless of any changes in the volume of the demand. Here, then, is to be found one of the causes for the “convulsions” in the discount rates prevalent in the Indian money market. As was pointed out by Mr. Van Den Berg:—

“The paper currency established by the Indian legislator fully answers the purpose, so far as business requires an easier means of exchange than gold or silver coin; but no connection whatever exists between the issue of the fiduciary currency and the wants of the public to have their bills or [pg 63] other commodities converted into a current medium of exchange … and this is the sole cause of the unexpected convulsions and sudden transitions in the money market so utterly detrimental to business to which the British Indian trade is constantly exposed.”¹²⁵

It may, however, be objected that such a view is only superficial. The Indian Paper Currency Act is a replica of the English Bank Act of 1844 in all its essentials. Like the English Bank Act, it set a definite limit to the fiduciary issue of notes. Like it, it separated the Issue Business from the Banking Business,¹²⁶ and if it made the banks in India mere banks of discount it is because it copied the Bank Charter Act, which deprived banks in England, including the Bank of England, from being banks of issue. And yet it cannot be said that the English money market is affected by such “convulsions and sudden transitions” as has been the case with the Indian money market. On the other hand, it was the considered opinion of Jevons¹²⁷ that “the Bank of England and bankers generally have just the same latitude in increasing or diminishing their advances now (i.e. under the Act of 1844) as they would have under a[n un]restricted system”; for, as he elsewhere argued, if the limitation on fiduciary issue is arbitrary, and if people want more money, “it is always open to them to use metallic money instead. The limitation is imposed not upon money itself, but upon the representative part.”¹²⁸ What, then, is the [pg 64] reason that the Indian Paper Currency Act should produce the evils which its English prototype did not? À priori there need be no such convulsions in a money market subject to such a law. The Act, by limiting the issue of notes, did seem to leave no choice but to use metallic money even for seasonal demand. This would be true if notes were the only form in which credit could be used. As a matter of fact, this is not so. Credit could take the form of a promise to pay issued by a bank as well as it could take the form of an order on the bank to pay, without making any difference to the social economy of the people who used them. Consequently, if under the provisions of the Act banks are restricted from issuing promises to pay, it does not follow that the only way open to them is a resort “to use metallic money instead,” for they are equally free to consent to honour as many orders to pay as they like. Indeed, the success or failure of the Act depends upon which of the two alternatives the banks adopt. It is obvious that those who will submit to the ruling of the Act and resort to metallic money will have to bear the “convulsions,” and those who will circumvent the Act by utilizing other forms of credit will escape them. The chief reason, then, why the Act has worked so well in England and so badly in India is due to the fact that, whereas English banks have succeeded in implanting the order or cheque system of using credit in place of the note system, Indian banks have unfortunately failed. That they should have failed was, however, inevitable. A cheque system presupposes a literate population, and a banking system which conducts its business in the vernacular of the people. Neither of these two conditions obtains in India. The population is mostly illiterate, and even were it otherwise it could not have availed itself of the cheque system, because Indian banks refuse to conduct their business in any other medium but English. Besides, the growth of the cheque system presupposes a widespread network of banks, a condition which is far from being fulfilled in India. In the absence of banking, a cheque is the worst instrument that could be handled. If not presented within a certain time a cheque may become stale and valueless, and is therefore [pg 65] inferior to a note as a store of wealth. In such circumstances as these it is no wonder that in India cheques did not come into being on a sufficiently large scale to amend the inelasticity of the notes.

But even if Indian banks had succeeded in making use of credit in a form other than that of notes, they could not have eased the money market to the same extent as the English banks have been able to do. One of the incidents of banking consists in the liability of banks to pay cash on demand. If all their deposits were received in cash this liability would involve no risk. As a matter of fact, a large part of their deposits consists of bills which they make it their business to undertake to pay in cash. One of the first things, therefore, that a banker has to look to is the proportion which his cash deposits bear to his credit deposits. Now, this proportion may be adversely affected either by an increase in his credit deposits or by diminution in his cash deposits. In either case his ability to pay cash is pro tanto weakened by lowering the ratio of his total cash to his total liabilities. Against an undue expansion of credit a banker may effectually guard himself. But, notwithstanding the development of the cheque system, there is always lurking the possibility of withdrawal of some cash at some time or other. A banker must, therefore, provide by keeping on hand a certain minimum reserve. How large should be the reserve depends upon what the possibilities for the withdrawal of cash are. The point is that to the extent of the reserve the power of the bank to grant credit is curtailed. If the reserve of the bank is already at the minimum it must stop discounting or must strengthen its position by recovering the cash withdrawn from its coffers. Now it is obvious that if the amount of money withdrawn is kept in the current of business where the banks can get at it, they of course can strengthen their position again immediately, and not only always keep themselves well away from the danger line of minimum reserve, but be always prepared to meet the needs of the money market. What was the position of the Indian banks from this point of view? Owing to the absence of a cheque system the [pg 66] possibilities for the withdrawal of cash are great, and the reserve was required to be large in consequence thereof. A large part of their funds being thus held for a reserve, their resources for discounting were small. But there was a further weakening of their position as lenders by reason of the fact that the cash withdrawn did not speedily return to them. The result was the Indian banks were obliged to curtail their discounts to a far greater extent than were the English banks, in order to preserve a due proportion between their cash and their credits. The absence of branch banking was an important desideratum in this regard. But, even if there were branch banks, the money withdrawn could not have returned, for it was not left in the current channels of business. It was locked up in Government treasuries whose operations were independent of the banking transactions of the country. Of course there could be nothing inherently wrong in the maintenance by a Government of an Independent Treasury, and if its operations were to have a resultant connection with the operations of the business community no harm need arise. But the operations of the Indian Treasury ran counter to the needs of business. It locked up when it should have released its hoards, and released its hoards when it should have locked them up.

The causes that “convulsed” the Indian money market had therefore been the inelasticity of the credit media and the working of the Independent Treasury System in so far as they were the prime factors affecting the money supply of the country (see Chart I). The evil effects of such convulsions of the discount rate can hardly be exaggerated.¹²⁹ In an economy in which almost every business man must rely, at certain seasons if not all the year round, on borrowed capital, the margin of profit may be wiped out by a sudden rise or augmented by a sudden fall in the rate of discount leading to under-trading or over-trading. Such fluctuations increase business risks, lead to higher business expenses and a greater cost to the consumer.

[pg 67] They bring about swings in prices, promote speculation, and prepare for panics. Evils such as these would have in any other country compelled the authorities to take proper steps to deal with them. But it is a curious fact that in India no serious attempts were made to alleviate the sufferings they inflicted upon the trading community. A reform of the paper currency or the abolition of the Independent Treasury System would have eased the situation, though a reform of both would have been better. The general community, however, was not desirous for a change of the paper currency,¹³⁰ but was anxious for the abolition of the Independent Treasury. The Government, on the other hand, refused to do away with its Independent Treasury System,¹³¹ and [pg 68] repudiated even its moral obligation to help the business community on the somewhat pedantic plea that in locking up currency it did not lock up capital.¹³² Nor is it possible [pg 69] to say, since it was not called upon to enunciate a policy, how far it would have gone to modify the Paper Currency Act so as to relieve the situation. Before, however, this controversy could end in a satisfactory solution for imparting to the currency system that element of elasticity which it needed, there developed another and a greater evil which affected its metallic counterpart in a degree sufficient to destroy its most vital element of steadiness and stability of value which it was its virtue to furnish. So enormous did the evil grow, and so pervasive were its effects, that it absorbed all attention to the exclusion of everything else. What fixity of value between the different units of its currency is to the internal transactions of a country, a par of exchange is to its external transactions. A par of exchange between any two countries expresses the relative exchange values of their respective currencies in terms of each other. [pg 70]

It is obvious from this that the par of exchange between any two countries will be stable if they employ the same metal functioning as their standard money freely convertible into and exportable as bullion, for in that case they would have as a measure of value a common medium, the value of which could not differ, given freedom of commerce, in the two countries by more than the cost of its transhipment, i.e. within specie points. On the other hand, there can be no fixed par of exchange between two countries having different metals as their currency standards of value. In that case their exchange is governed by the relative values of gold and silver, and must necessarily fluctuate with changes in their value relation. The limit to the exchange fluctuations between them will be as wide or as narrow as the limit to fluctuations in the relative values of the two metals may happen to be. When, therefore, two countries such as England and India are separated by differences in their metallic standards, theoretically there could be no possibility for a stable par of exchange between them. But, as a matter of fact, notwithstanding the difference in their metallic standards, the rate of exchange between England and India seldom deviated¹³³ from the normal¹³⁴ rate of 1 s. 10½ d. for R.1. So steady was the rate up to 1873 that few people were conscious of the fact that the two countries had different currency standards. After 1873, however, the rupee-sterling exchange suddenly broke loose from this

[pg 71] normal parity, and the dislocation it caused was so great and so disorderly (Chart II) that no one knew where it would stop.

The rupee-sterling exchange was in reality a reflection of the gold-silver exchange. When, therefore, it is said that the rupee-sterling before 1873 was stable at 1 s. 10½ d., it merely meant that the gold-silver exchange before 1873 was stable at the ratio of 1 to 15½; and that the rupee-sterling exchange was dislocated after 1873 meant that the gold-silver exchange lost its old moorings. The question which therefore arises is why was the ratio of exchange between gold and silver disturbed after 1873, as it never was before that year? Two factors have been appealed to as affording a sufficient explanation of what then appeared as a strange phenomenon. One was the demonetization of silver as the standard money medium by the principal countries of the world. This movement in favour of demonetization of silver was the outcome of an innocent agitation for uniformity of weights, measures, and coinages. In so far as the agitation was aimed at such uniformity it was in every way beneficial. But it also exemplifies how the pursuit of good sometimes leaves behind a legacy of evils. At the Great Exhibition held in London in 1851 the great difficulty of comparing the different exhibits owing to the differences of weights, measures, and coinages as between the countries of their origin and other countries was amply demonstrated to the representatives of the different nations assembled at that exhibition.¹³⁵ The question of international uniformity in weights, measures, and coins was discussed by the various scientific assemblies gathered at this exhibition, and although nothing tangible came out of it, the question was not allowed to be dropped: it was taken up at the Brussels International Statistical Congress held two years after. Opinion had so far advanced that the next Statistical Congress, held at Paris, issued a declaration, which was confirmed by the Vienna Statistical Congress of 1859, strongly urging the necessity of bringing about the desired [pg 72] uniformity in the weights, measures, and coinages of different countries.¹³⁶ Encouraged by the action of England, which had made in 1862 the metric system of weights and measures optional, the 1863 International Statistical Congress of Berlin resolved to invite the different Governments “to send to a special Congress delegates authorized to consider and report what should be the relative weights in the … gold and silver coins, and to arrange the details by which the monetary systems of the different countries might be fixed, upon a single unit decimally subdivided.”¹³⁷ The significance of this Congress can hardly be overlooked. It made a departure. At the former Congresses the question debated was largely one of uniformity in weights and measures. But at this Congress “that phase of it was subordinated to uniform coinage and was well-nigh laid aside.”¹³⁸ Though the resolution was a departure it should not have been fraught with serious consequences if the reform had been confined to the question of uniformity of coinage. But there occurred a circumstance which extended its application to the question of currency. When this agitation for uniform coinage grew apace the French quite naturally wished that their coinage system, which had already been extended over the area comprised by the Latin Union, should be taken as a model to be copied by other countries outside the Union in the interest of uniformity. With this end in view the French Government approached the British Government of the time, but was told in reply that the British Government could not consider the suggestion until France adopted the single gold standard.¹³⁹ Far from being taken aback, the French Government, then so anxious to cultivate the goodwill of England, proved so complacent that it felt no compunction in conceding to the British the pre-requisite it demanded, and indeed went so far out of the way, when the Conference met in Paris in [pg 73] 1867, that it actually manœuvred¹⁴⁰ the Assembly into passing a resolution “that for uniform international coinage it was necessary that gold alone should be the principal currency of the world.” So much importance was attached to the question of uniformity of coinage that those who passed the resolution seemed not to have noticed what sacrifice they were called upon to make for its achievement. Perhaps it would be more correct to say that they did not know that they were affecting by their decision the currency system of the world. All they thought they were doing at the time was to promote uniformity of coinage and nothing more.¹⁴¹ But whatever the extenuating circumstances, the result was disastrous, for when the resolution came to be acted upon by the different countries assembled, the real end of the Conference, namely uniformity of coinage, was completely lost sight of, and the proposed means eventually became the virtual end.

The ball once set rolling, the work of demonetizing silver began to grow apace. First in the field was Germany. Having vanquished France in the war of 1870, she utilized the war indemnity in the reform of her chaotic currency¹⁴² by hastening to adopt a gold currency for the United Empire of Germany. The law of December 4, 1871, authorized the change, with the mark as the unit of currency. Silver was demonetized by this enactment; but the existing silver coins continued to be legal tender, though their further coinage was stopped, along with the new gold coins at the legal ratio of 15½ to 1. This full legal-tender power of the silver coins was taken away from them by the law of June 9, 1873, which reduced them to the position of a subsidiary currency.¹⁴³ This policy was immediately copied by other [pg 74] countries of Germanic culture.¹⁴⁴ In 1872 Norway, Sweden, and Denmark formed a Scandinavian Monetary Union, analogous to the Latin Monetary Union, by which they agreed to demonetize silver as was done by Germany. This treaty, which established a gold standard and reduced the existing silver currency to a subsidiary status, was ratified by Sweden and Denmark in 1873 and by Norway in 1875. Holland also followed the same course. Till 1872 she had a pure silver standard. In that year she closed her Mint to the free coinage of silver, although the old silver money continued to be legal tender to any amount. In 1875 she went a step further and opened her Mints to the free coinage of gold. Her policy differed from that of the Germanic countries in that she only suspended the free coinage of silver, while the latter had demonetized it. Even the Latin Union was unable to resist this tide against silver. As a consequence of this exclusion of silver, the Latin Union, enlarged as it was by additional members, naturally desired to take precautionary measures against being flooded by the influx of this depreciated silver. Nor was this fear unfounded, for the silver tendered for coinage at the Belgian Mint in 1873 was three times greater than what was tendered in 1871. Rather than be embarrassed, Belgium, by the law of December 8, 1873, suspended the free coinage of her silver five-franc pieces. This action of Belgium forced the hands of the other members of the Union to adopt similar measures. The delegates of the Union met in Paris in January, 1874, and

“agreed to a treaty supplementary to that originally framed in 1865, and determined on withdrawing from individuals the full power of free coinage by limiting to a moderate sum the silver five-franc pieces which should be coined by each State of the Union during the year 1874.”¹⁴⁵

The respective quotas fixed for 1874 were slightly increased [pg 75] in 1875, but were reduced in 1876.¹⁴⁶ But the actual coinage did not even reach these small quotas. So greatly was the Union perturbed by the silver situation that during 1877 the coinage of silver five-franc pieces was, with the exception of Italy,¹⁴⁷ entirely suspended. This action was, however, only a preliminary to the Treaty of November 5, 1878, by which the Latin Union agreed to close its Mints to the free coinage of silver till further action. Though at first sine die, the closure proved in the end perpetual.¹⁴⁸ Simultaneously with the precautionary measures of the Latin Union, Russia suspended, in 1876, the free coinage of silver except to such an amount as was necessary for the purposes of her trade with China,¹⁴⁹ and the Imperial Decree of November 22, 1878, directed that all customs duties above 5 roubles and 15 copecks should be payable in gold.¹⁵⁰ Austria in like manner suspended the free coinage of silver in 1879.¹⁵¹

On the other side of the Atlantic an important event had taken place in the United States. In 1870 that Government resolved to consolidate the Mint laws, which had not been revised since 1837, in a comprehensive statute. Since the legislation of 1853 the silver dollar was the only coin which the United States Mints coined freely. But in the new consolidated Mint Statute of 1873 the silver dollar was deleted from the list of coins to be issued from the Mint, [pg 76] so that it virtually amounted to suspension of the free coinage of silver in the United States.¹⁵² The silver dollars previously coined continued to circulate as full legal tender, but that power was taken away by the law of June, 1874, which declared that “the silver coins of the United States shall be a legal tender at their nominal value for any amount not exceeding five dollars in any one payment.”

The other factor appealed to in explanation of the dislocation of the relative values of gold and silver was the great increase in the production of silver as compared to gold.

TABLE IX

Relative Production of Gold and Silver (Ounces)

Period	Total Production.		Annual Average Production		Index Number for Average Annual Production.
	Gold.	Silver.	Gold.	Silver.	Gold.	Silver.
1493–1600	24,266,820	734,125,960	224,693	6,797,463	100	100
1601–1700	29,330,445	1,197,073,100	293,304	11,970,731	130·5	176·1
1701–1800	61,088,215	1,833,672,035	610,882	18,336,720	271·8	269·7
1801–1840	20,488,552	801,155,495	512,217	20,028,887	227·9	293·1
1841–1870	143,186,294	931,091,326	4,772,876	31,038,378	2,124·1	456·6
1871–1890	106,950,802	1,715,039,955	5,347,545	85,751,998	2,375·4	1,261·5

The history of the production of the precious metals in modern times begins from the year 1493, a date which marks the discovery of the American continent. Reviewing the results of the production from 1493 to 1893, a period in all of 400 years, we find that during the first hundred years the [pg 77] production of gold and silver rises at a uniform rate of progression. Assuming the annual average production of each during the first century (1493–1600) in the modern history of their production to be 100, it will be seen that in the next century (1601–1700) the index number for the production of gold rises to 130 and that of silver to 176. This rate of progression is also kept up in the succeeding century (1700–1800), during which the figure for both gold and silver approximates to 270, and continues without much disturbance up to 1840, when the respective index numbers stood at 228 for gold and 293 for silver. From this point onwards the relative production of the two metals underwent a complete revolution. During the next thirty years (1841–70) the production of gold reached unprecedented heights, while that of silver lagged behind, relatively speaking. The index number for silver production advanced only to 450, but that for gold went up to 2,124. This revolution was followed by a counter-revolution, as a result of which the position as it stood at the end of 1870 was well-nigh reversed. The production of gold received a sudden check, and though it had increased enormously between 1840–70 it remained stationary between 1870–93. On the other hand, the production of silver, which was steady between 1841–70, increased threefold between 1870–93, so that the index number for its average annual production during the latter period stood at 1,260.

In the controversy which arose over the reasons which brought about this dislocation and decline in the value of silver in terms of gold, there were parties to whom one of these two factors was a sufficient cause. One side argued that had suspension or demonetization of silver not taken place its value could never have fallen. This position was vehemently challenged by the other side, which believed in the over-supply of silver as the primary cause of its depreciation. Now was the argument from relative over-supply sufficient to account for the fall in the gold value of silver? On the face of it the explanation has the plausibility of a simple proposition. It is one of the elementary theorems of political economy that the value of a thing varies inversely [pg 78] with its supply, and if the supply of silver had largely increased, what could be more natural than that its value in terms of gold should fall? The following were the relevant facts which formed the basis of the argument:—

TABLE X

Gold and Silver¹⁵³ Relative Production and Relative Value

Period.	Ratio of Production (by Weight) of Gold to Silver. As 1 Grain to:	Ratio of Value of Gold to Silver. As 1 Grain to:	Index Number for the Ratio of Production.	Index Number for the Ratio of Value.	Correlation between Relative Production and Relative Value.
					Relative Production of Silver. Falls - Rises +	Relative Value of Silver. Falls - Rises +
1681–1700	31·8	14·95	100	100	—	—
1701–1720	27·7	15·21	87	101·7	−13	−1·7
1721–1740	22·6	15·10	71	101	−29	−1·0
1741–1760	21·7	14·70	67	98·3	−33	+1·7
1761–1780	31·5	14·40	99	96·3	−1	+3·7
1781–1800	49·4	15·08	155·6	100·8	+55·6	−.8
1801–1810	50·3	15·67	158·0	104·8	+58·0	−4·8
1811–1820	47·2	15·68	148·0	104·9	+48·0	−4·9
1821–1830	32·4	15·82	101·9	105·8	+1·9	−5·8
1831–1840	29·4	15·77	92·4	105·4	−7·6	−5·4
1841–1850	14·2	15·81	44·6	105·8	−55·4	−5·8
1851–1855	4·4	15·45	13·8	103·3	−86·2	−3·3
1856–1860	4·5	15·28	14·0	102·2	−86·0	−2·2
1861–1865	5·9	15·42	18·55	103·1	−81·5	−3·1
1866–1870	6·9	15·52	21·7	103·8	−78·3	−3·8
1871–1875	11·3	16·10	35·5	107·6	−64·5	−7·6
1876–1880	13·2	17·79	41·5	119·0	−58·5	−19·0
1881–1886	17·3	18·81	54·4	125·8	−45·6	−25·8
1886–1890	19·9	20·98	62·6	140·3	−37·4	−40·3
1891–1895	20·0	26·75	62·9	178·9	−37·1	−78·9

The facts thus presented led to two conclusions. The first is that the supposed enormous increase in the relative production of silver was an assumption which had no foundation [pg 79] in reality. On the contrary, glance at the figures for relative production discloses the curious fact that since the beginning of the eighteenth century silver, instead of rising, has been falling in proportion. With the exception of the first quarter of the nineteenth century, silver had formed, throughout the two centuries covered by the table, a diminishing proportion as compared with gold.¹⁵⁴ Indeed, never was the proportion of silver so low as it was in the latter half of the nineteenth century, and even when after 1873 it began to grow it did not reach half the magnitude it had reached in the beginning of the eighteenth century. The second conclusion which these facts were claimed to sustain was that the value of silver in terms of gold did not move in sympathy with its supply relative to that of gold. According to theory, the value of silver should have been rising because the relative volume of its production had been diminishing. On the other hand, a closer examination of the figures of relative values and relative productions, as given in the foregoing table, instead of showing any close correlation (see Chart III) between them, pointed to the contrary. Instead of supply and value being inverse in proportion, it showed that as its supply was falling there was also a fall in its value. Such being the facts of history, it was contended that they gave no support to those who rested their case on over-supply rather than on demonetization as a sufficient explanation for the depreciation of silver.

Apart from such minor points, the issue was considerably narrowed by the peculiarity of the events of the twenty years preceding and following the year 1873.¹⁵⁵ Compare, it was said, the period commencing with 1848 and ending [pg 80] with the year 1870 with the period following 1870, and there emerges the arresting fact that these two periods, though they have been the opposite of each other with reference to the relative values of the two metals, were alike with reference to the changes in their relative supply. The period between 1870 and 1893 on the side of relative production was marked by the preponderance of silver. The period between 1848 and 1870 is an exact parallel to the above period with respect to changes in the relative supply of the two precious metals, only in this case it was gold that had increased in volume. Now, if it is over-supply that governed the value relations of the two metals in the second period (1870–93) the same should be true of their value relations in the first period (1848–70). Was there, then, a disturbance in the relative values of the two metals in the first period anything like what took place in the second period? It was insisted that the disturbance in the ratios of production of the two metals in the first period was enormously greater than that which occurred in the second period. Indeed, comparatively speaking, the disturbance in the second period was nothing to speak of. And yet their relative (value during the first period was well-nigh constant at the ratio of 1 to 15½, while in the second it fluctuated between 16·10 and 26·75. Those who argued that the value of silver fell after 1873 because of its over-supply were thus faced with the problem as to why the value of gold did not fall when its supply had become so abundant before 1873. The whole controversy was therefore centred into the question as to what could have made this difference in the two situations? If the colossal increase in the production of gold in the first period did not raise the value of silver by more than 2 per cent., how was it that a comparatively insignificant rise in the relative production of silver in the second period led to such an enormous rise in the price of gold? What was the controlling influence present in the one case which was absent in the other? Those who held that it was demonetization of silver that was responsible for its depreciation argued that, though alike in every way, the two periods differed in one important [pg 81] particular. What distinguished them was the fact that in the former it was a common practice to define the standard money of a country as a certain quantity of gold or a certain quantity of silver. Prior to 1803 the two metals were rated differently in different countries,¹⁵⁶ but since that date the rating of 1 to 15½ became more uniform, with the result that the monetary standard throughout that period was either 1 gr. of gold or 15½ grs. of silver. On the other hand, during the second period, the “or” which characterized the first period was deleted by the silver-demonetizing and suspending decrees. In other words, the first period was characterized by the prevalence of bimetallism under which the two metals could be used interchangeably at a fixed given ratio. In the second period they could not be so used owing to the fact that the fixed ratio necessary for interchange had been abrogated. Now, could the existence or non-existence of a fixed ratio be said to be such a powerful influence as to make the whole difference that set the two periods in such marked contrast? That this was the factor which made the whole difference was the view of the bimetallists. It was said that, by virtue of the monetary system prevalent during the first period, gold and silver were rendered substitutes and were regarded as “one commodity of two different strengths.” So related, the conditions of supply had no effect upon their ratio of exchange, as would have been the case in respect of a commodity without a substitute. In the case of commodities which are substitutes, the relative scarcity of one can give it no greater value in terms of the other than that defined by their ratio of exchange, because by reason of the freedom of substitution the scarcity can be made good by the abundance of the other. On the other hand, the relative abundance of one can not depreciate its value in terms of the other below the ratio of exchange, because its superfluity can be absorbed by the void created in consequence of a paucity of the other. So long as they remain substitutes with a fixed ratio of substitution, nothing originating in demand or supply could disturb their [pg 82] ratio. The two being one commodity, whatever changes take place in the demand or supply of either system beyond the needs of commerce express themselves in the price level exactly as though one of them alone was the money medium; but their ratio of exchange will be preserved intact in any case.

In support of this was cited the authority of Jevons, who said:¹⁵⁷

“Whenever different commodities are thus applicable to the same purposes their conditions of demand and exchange are not independent. Their mutual ratio of exchange cannot vary much for it will be closely defined by the ratio of their utilities. Beef and mutton differ so slightly that people eat them almost indifferently. But the wholesale price of mutton, on an average, exceeds that of beef in the ratio of 9 to 8, and we must therefore conclude that people generally esteem mutton more than beef in this proportion, otherwise they would not buy the dear meat. … So long as the equation of utility holds true, the ratio of exchange between mutton and beef will not diverge from that of 8 to 9. If the supply of beef falls off people will not pay a higher price for it, but will eat more mutton; and if the supply of mutton falls off, they will eat more beef. … We must, in fact, treat beef and mutton as one commodity of two different strengths—just as gold at 18 carats and gold at 20 carats are hardly considered as two but rather as one commodity, of which twenty parts of one are equivalent to eighteen of the other.

“It is upon this principle that we must explain, in harmony with Cairnes' views, the extraordinary permanence of the ratio of exchange of gold and silver, which from the commencement of the eighteenth century up to recent years never diverged much from 15 to 1. That this fixedness of ratio did not depend entirely upon the amount or cost of production is proved by the very slight effect of the Australian and Californian gold discoveries, which never raised the gold price of silver more than about 4⅔ per cent., and failed to have more than a permanent effect of 1½ per cent. This permanence of relative values may have been partially due to the fact that gold and silver can be employed for [pg 83] exactly the same purposes, but that the superior brilliancy of gold occasions it to be preferred, unless it be about 15 or 15½ times as costly as silver. Much more probably, however, the explanation of the fact is to be found in the fixed ratio of 15½ to 1, according to which these metals are exchanged in the currency of France and some other continental countries. The French Currency Law of the year XI established an artificial¹⁵⁸ equation—

Utility of gold = 15½ × utility of silver

[pg 84] and it is probably not without some reason that Wolowski and other recent French economists attributed to this law of replacement an important effect in preventing disturbance in the relations of gold and silver.”

But granting that before 1873 the ratio was preserved owing to the compensatory action of the bimetallic law, can it be said that it would have been maintained after 1873 if the law had not been suspended? To give an uncompromising affirmative as the bimetallists did is to suppose that bimetallism can work under all conditions. As a matter of fact, though it is workable under certain conditions it is not workable under other conditions. These conditions are well described by Prof. Fisher.¹⁵⁹ The question under bimetallism is whether the market ratio between gold and silver bullion will always be the same as the legal ratio between gold and silver coins freely minted and possessing unlimited legal-tender power. Now supposing the supply of silver bullion has increased relatively to that of gold bullion, the result will obviously be a divergence in the mint and the market ratio. Will the compensatory action of the bimetallic law restore the equilibrium? It may succeed in [pg 85] doing it or it may not. If the increase in the supply of silver bullion and the decrease in that of gold bullion are such that a decrease in that of silver caused by its inflow into the currency and an increase in that of gold caused by its outflow from currency can restore then to their old levels as bullion, bimetallism would succeed; in other words, the market ratio of the two bullions would tend to return to the mint ratio. But if the increase in the supply of silver bullion and the decrease in that of gold is such that the outflow of silver bullion into currency reduces the level of the silver bullion to the old level, but the outflow of gold bullion from currency does not suffice to raise the level of the gold bullion to the old level, or if the outflow of gold from currency raises the level of the gold bullion to the old level, but the inflow of silver into currency does not result in the reduction of the level of silver bullion to its old level, bimetallism must fail; in other words, the market ratio of the two bullions will remain diverted from the mint ratio legally established between their coins.

Under which of these two possibilities could the circumstances arising after 1873 have fallen? That is a question about which no one can say anything definitely. Even Jevons, who admitted the success of the bimetallic law in the earlier period, was not very sanguine about its success in the latter period. It was he who observed¹⁶⁰

“that the question of bimetallism is one which does not admit of any precise and simple answer. It is essentially an indeterminate problem. It involves several variable quantities and many constant quantities, the latter being either inaccurately known or, in many cases, altogether unknown. …”

None the less, it is certain that the divergence between the mint ratio and the market ratio under a bimetallic system must be smaller than may be the case where there is no bimetallic system. Whenever the market ratio diverges from the mint ratio the compensatory action under the bimetallic law tends to restore the equilibrium, and even where it fails in restoring it, it does succeed in abridging the [pg 86] gulf between the two ratios. That being the case, it is safe to argue that had there been no demonetization of silver after 1873 the ratio between gold and silver would have probably been preserved as it was during the monetary disturbances of the earlier period. At any rate, this much is certain, that the market ratio between the two metals could not have diverged from the mint ratio to the extent it actually did.¹⁶¹

It is therefore a sad commentary on the monetary legislation of the seventies that if it did not actually help to create, for no purpose, a problem unknown before, it certainly helped to make worse a bad situation. Prior to 1870 not all countries had a common currency. There were India and countries of Western Europe which were exclusively on a silver basis, and others, like England and Portugal, which were exclusively on a gold basis, and yet none of them felt the want of a common standard of value in their mutual dealings. So long as there existed the fixed-ratio system in France and the Latin Union the problem was really provided for, for under it the two metals behaved as one and thereby furnished a common standard, although all countries did not use the same metal as their standard money. It was therefore a matter of comparative indifference to most countries which metal they used so long as there was some one country which used either at a certain defined ratio. With the destruction of this fixed ratio what was thus a matter of comparative indifference became a matter of supreme concern. Every country which had before enjoyed the benefits of a common international standard without having a common currency was faced with a crisis in which the choice lay between sacrificing its currency to securing a common standard or hugging its currency and foregoing the benefits of a common standard. That exigencies of a common standard ultimately led to its accomplishment was as it should have been, but it was not a fact before a great deal of harm and some heavy burdens had brought home to people what the want of it really meant to them. [pg 87]

CHAPTER III

The economic consequences of this rupture of the par of exchange were of the most far-reaching character. It divided the commercial world into two sharply defined groups, one using gold and the other using silver as their standard money. When so much gold was always equal to so much silver, as was the case previous to 1873, it mattered very little, for the purposes of international transactions, whether a country was on a gold or on a silver standard; nor did it make any difference in which of the two currencies its obligations were stipulated and realized. But when, owing to the dislocation of the fixed par, it was not possible to define how much silver was equal to how much gold from year to year or even from month to month, this precision of value, the very soul of pecuniary exchange, gave place to the uncertainties of gambling. Of course all countries were not drawn into this vortex of perplexities in the same degree and to the same extent, yet it was impossible for any country which participated in international commerce to escape from being dragged into it. This was true of India as it was of no other country. She was a silver-standard country intimately bound to a gold standard country, so that her economic and financial life was at the mercy of blind forces operating upon the relative values of gold and silver which governed the rupee-sterling exchange.

The fall increased the burden of those who were under an obligation to make gold payments. Amongst such the most [pg 88] heavily charged was the Government of India. Owing to the exigencies of its political constitution, that Government has been under the necessity of making certain payments in England to meet: (1) Interest on debt and on the stock of the guaranteed railway companies; (2) expenses on account of the European troops maintained in India; (3) pensions and non-effective allowances payable in England; (4) cost of the home administration;¹⁶² and (5) stores purchased in England for use or consumption in India. England being a gold-standard country, these payments were necessarily gold payments. But the revenues of the Government of India out of which these payments were met were received in silver, which was the sole legal-tender money of the country. It is evident that even if the gold payments were a fixed quantity their burden must increase pari passu with the fall in the gold value of silver. But the gold payments were not a fixed quantity. They have ever been on the increase, so that the rupee cost of the gold payments grew both by reason of the growth in their magnitude, and also by reason of the contraction of the medium, i.e. the appreciation of gold, in which they were payable. How greatly this double levy diminished the revenues of India, the figures on the opposite page give a convincing testimony.

TABLE XI

The Increase in the Rupee Cost of Gold Payments¹⁶³

Financial Year	Average Rate of Exchange for the Year.		Total Excess of Rupees needed to provide for the net Sterling Payments of the Year over those required to meet the Sterling Payments of 1874–75.	Amount of this Excess due to
				(1) Fall in the Rate of Exchange over that of 1874–75.	(2) Increase in gold Payments over those of the Year 1874–75.
	s.	d.	R	R	R
1875–76	1	9·626	86,97,980	41,13,723	45,84,257
1876–77	1	8·508	3,15,06,824	1,44,68,234	1,70,38,590
1877–78	1	8·791	1,30,05,481	1,14,58,670	1,15,46,811
1878–79	1	7·794	1,85,23,170	1,04,16,718	81,06,452
1879–80	1	7·961	39,23,570	1,65,37,394	−1,26,13,824
1880–81	1	7·956	3,12,11,981	1,92,82,582	1,19,29,399
1881–82	1	7·895	3,18,19,685	1,98,76,786	1,19,42,899
1882–83	1	7·525	−62,50,518	1,86,35,246	−2,48,85,764
1883–84	1	7·536	3,44,16,,685	2,33,46,040	1,10,70,645
1884–85	1	7·308	1,96,25,981	2,48,03,423	51,77,442
1885–86	1	6·254	−1,82,11,346	2,54,95,337	−4,37,06,683
1886–87	1	5·441	4,69,16,788	4,46,68,299	−33,47,376
1887–88	1	4·898	4,63,13,161	4,96,60,536	−33,47,376
1888–89	1	4·379	9,00,38,166	6,59,71,998	2,40,66,168
1889–90	1	4·566	7,75,96,889	6,06,98,370	1,68,98,519
1890–91	1	6·090	9,06,11,857	4,65,48,302	4,40,63,555
1891–92	1	4·733	10,44,44,529	6,54,52,999	3,89,91,530

The effect of such a growing burden on the finance of the Government may well be imagined; the condition of the Government, embarrassing at first, later became quite desperate under this continuously increasing burden. It enforced a policy of high taxation and rigid economy in the finances of the Government. Analysing the resource side of the Indian Budgets from the year 1872–73, we find that there was hardly any year which did not expire without making an addition to the existing imposts of the country. In 1872–73 there commenced the levy of what were called Provincial Rates. The fiscal year 1875–76 witnessed the addition of R.1 per gallon in the excise duty on spirits. In 1877–78 the Pass Duty on Malwa opium was raised from [pg 89] Rs. 600 to Rs. 650 per chest. An addition of a Licence Tax and Local Rates was made in the year 1878–79, and an increase of Rs. 50 per chest took place in the Malwa Opium Duty in the following year. With the help of these imposts the Government expected to place its finances on an adequate basis. By the end of 1882 it felt quite secure and even went so far as to remit some of the taxes, which it did by lowering the customs duties and the Patwari Cess in the North-Western Provinces. But the rapid pace in the fall of the exchange soon showed that a resort to further taxation was [pg 90] necessary to make up for the increased cost of the sterling payments. To the existing burdens, therefore, was added in 1886 an Income Tax, a duty of 5 per cent. on imported and also on non-illuminating petroleum. The Salt Duty was raised in 1888 in India from Rs. 2 to Rs. 2½, and in Burma from 3 annas to R. 1 per maund. The Patwari Cess of the North-Western Provinces, repealed in 1882, was re-imposed in 1888. The rates of duty on imported spirit and the excise duties on spirits were not only raised in 1890, but were afterwards added to in every province. An excise duty on malt liquor was levied in 1893, and another on salted fish at the rate of 6 annas per maund. The yield of the taxes and duties levied from 1882–83 was¹⁶⁴ as follows:—

Sources	1882–83.	1892–93.
	Rs.	Rs.
Salt	5,67,50,000	8,14,90,000
Excise	3,47,50,000	4,97,90,000
Customs	1,08,90,000	1,41,80,000
Assessed Taxes	48,40,000	1,63,60,000

All this additional burden was due to the enhanced cost of meeting the gold payments, and “would not have been necessary but for the fall in the exchange.”¹⁶⁵

Along with this increase of resources the Government of India also exercised the virtue of economy in the cost of administration. For the first time in its history the Government turned to the alternative of employing the comparatively cheaper agency of the natives of the country in place of the imported Englishmen. Prior to 1870 the scope of effecting economy along this line was very limited. By the Civil Service Reforms of 1853¹⁶⁶ the way was cleared for the appointment of Indians to the posts reserved for the members of the covenanted Civil Service by the statute of [pg 91] 1793.¹⁶⁷ But this reform did not conduce to any economy in the cost of the administration, because the Indian members carried the same high scale of salaries as did the English members of the Civil Service. It was when the statute of 1870 (33 Vic. c. 3) was passed permitting the appointment by nomination of non-covenanted Indians to places reserved for the covenanted Civil Service on a lower scale of salary, that a real scope for economy presented itself to the Government of India. Hard pressed, the Government of India availed itself of the possibilities for economy held out by this statute. So great was the need for economy and so powerful was the interest of the Government in reducing its expenditure that it proceeded, notwithstanding increased demands for efficient administration, to substitute the less expensive agency of non-covenanted civilians in place of the more expensive agency of the covenanted civilians. The scale on which this substitution was effected was by no means small, for we find that between 1874 and 1889 the strength of the covenanted service recruited in England was reduced by more than 22 per cent., and was further expected to be reduced by about 12 per cent., by the employment of uncovenanted Indians to the posts usually reserved for covenanted civilians.¹⁶⁸ Besides substituting a cheap for a dear agency in the administration, the Government also sought to obtain relief by applying the pruning knife to the rank growth in departmental extravagances.¹⁶⁹ Even with such heroic efforts to increase the revenue and reduce the expenditure the finances of the Government throughout the period of the falling exchange were never in a flourishing state.

Much more regrettable was the inability of the Government, owing to its financial difficulties, to find money for useful public works. The welfare of the Indian people [pg 92]

TABLE XII

Revenue and Expenditure of the Government of India

Year.	Average Rate of Exchange.	In India.			In England.		Final Result.
		Net Revenue.	Net Expenditure excluding Exchange.	Surplus Revenue.	Net Sterling Revenue.	Exchange.	Surplus (+) or Deficit (−)
	d.	R.	R.	R.	£	R.	R.
1874–75	22·156	39,564,216	25,897,098	13,667,118	12,562,101	1,045,239	59,778
1875–76	21·626	40,053,419	24,541,923	15,511,496	12,544,813	1,377,428	1,589,255
1876–77	20·508	38,253,366	25,355,285	12,898,081	13,229,646	2,252,611	−2,584,176
1877–78	20·791	39,275,489	27,658,021	11,617,468	13,756,478	2,123,030	−4,262,040
1878–79	19·794	44,415,139	25,778,928	18,636,211	13,610,211	2,891,902	2,134,098
1879–80	19·961	45,258,197	29,384,030	15,874,167	14,223,891	2,878,169	−1,227,893
1880–81	19·956	44,691,119	34,880,434	9,810,085	11,177,231	2,264,848	−3,031,394
1881–82	19·895	45,471,887	27,717,249	17,754,638	11,737,688	2,421,499	3,595,451
1882–83	19·525	42,526,173	25,500,437	17,025,736	13,299,976	3,050,923	674,837
1883–84	19·536	43,591,273	23,566,381	20,024,892	14,770,257	3,375,158	1,879,477
1884–85	19·308	41,585,347	24,763,779	16,821,568	13,844,028	3,363,986	−386,446
1885–86	18·254	42,635,953	27,352,132	15,283,821	13,755,659	4,329,888	−2,801,726
1886–87	17·441	44,804,774	25,124,335	19,680,439	14,172,298	5,329,714	178,427
1887–88	16·898	45,424,150	25,968,025	19,456,125	15,128,018	6,356,939	−2,028,832
1888–89	16·379	46,558,354	25,051,147	21,507,207	14,652,590	6,817,599	37,018
1889–90	16·566	50,005,810	26,367,855	23,637,955	14,513,155	6,512,767	2,612,033
1890–91	18·090	49,403,819	25,579,727	23,824,092	15,176,866	4,959,055	3,688,171
1891–92	16·733	50,023,142	27,013,618	23,009,524	15,716,780	6,825,909	467,535

[pg 93] depends upon turning to best account the resources which the country possesses. But the people have had very little of the necessary spirit of enterprise in them. The task, therefore, has fallen upon the Government of India to provide the country with the two prime requisites of a sustained economic life, namely a system of transport and a network of irrigation. With this object in view the Government had inaugurated a policy of developing what were called “Extraordinary Public Works,” financed by capital borrowings. For such borrowings India, as was to be expected, hardly offered any market, the people being too poor and their savings too scanty to furnish a modicum of the required capital outlay. Like all Governments of poor peoples, the Government of India had therefore to turn to wealthier countries who had surplus capital to lend. All these countries unfortunately happened to be on the gold standard. As long as it was possible to say that so much gold was equal to so much silver the English investor was indifferent whether the securities of the Government of India were rupee securities or sterling securities. But the fall in the gold value of silver was also a fall in the gold value of the rupee securities, and what was once a secure investment ceased to be so any more. This placed the Government in a difficult position in the matter of financing its extraordinary public works.

The English investor would not invest in the rupee securities. An important customer for the Indian rupee securities was thus lost. The response of the Indian money market was inadequate. To issue sterling securities was the only alternative to enable the Government to tap a bigger and a more constant reservoir for the drawing of capital to India; but as it was bound to increase the burden of the gold payments, which it was the strongest interest of the Government to reduce, the resort to the London money market, unavoidable as it became, was somewhat restrained,¹⁷⁰ [pg 94]

TABLE XIII

Price Movements of the Rupee and Sterling Securities of the Government of India¹⁷¹

Year.

Rates of Exchange.

Price of 4 per cent. Rupee Paper.

Price of Sterling India Stock.

In Calcutta.

In London.

4 per cent.

3½ per cent.

3 per cent.

Highest.

Lowest.

Highest.

Lowest.

Highest.

Lowest.

Highest.

Lowest.

Highest.

Lowest.

Highest.

Lowest.

1873

22⅞

21⅝

105

101⅞

97

94½

106½

101¼

1874

23⅛

21¾

104½

99½

98

94½

103¾

101

1875

22 3⁄16

21¼

102⅞

101¾

94

91

106¼

103¼

1876

22⅜

18½

101⅞

98¾

89¾

78

105⅞

101⅞

1877

22¼

20 9⁄16

98⅞

93¼

88½

81

104⅝

102¼

1878

21

18¾

96⅞

93½

82½

75⅜

104⅝

99

1879

20⅝

18⅝

94⅞

91¼

80

77¼

105⅜

100⅞

1880

20⅜

19¾

100

92 15⁄16

81⅜

77¾

105⅝

102⅛

1881

20 1⁄16

19½

104⅝

100

86

81½

106⅜

103⅞

103⅞

100¾

1882

20 3⁄16

19 1⁄16

102 1⁄16

95⅝

85

81

105⅛

102⅞

101⅞

99¾

1883

19 9⁄16

19 3⁄16

101⅛

97 9⁄16

82

79¾

104⅝

102 7⁄16

103⅛

101⅜

1884

19¾

18 15⁄16

100⅝

95 5⁄16

81¾

78¼

104⅜

101⅝

107⅛

101¾

96¼

91¾

1885

19 3⁄16

17 11⁄32

98 7⁄16

92¼

77½

73¼

103 1⁄16

98¾

102¾

97½

91½

85¾

1886

18

16⅛

97¾

97 3⁄16

73

66¼

103½

101¼

102¾

99¾

90⅛

86⅝

1887

18 3⁄16

15⅝

99 3⁄16

95 5⁄16

71 11⁄16

67⅞

102¾

100½

103¼

100¼

92¾

95⅜

1888

17⅛

16

100 3⁄16

97¾

69⅜

66¼

102⅞

100½

107¼

104⅝

98

95

1889

16 15⁄16

16

100⅜

97 1⁄16

69⅛

66⅜

109½

106⅞

101⅛

99

1890

20 29⁄32

16⅞

103⅞

96 13⁄16

87¼

68¾

108½

105¼

100¾

95¼

1891

18¼

16⅝

107 13⁄16

104 1⁄16

80¾

74¼

109½

105

99

94½

1892

16 11⁄16

14⅝

108 15⁄16

103 11⁄15

74½

62

109½

106⅛

98½

94⅞

[pg 95] with the result that the expansion of extraordinary public works did not proceed at a pace demanded by the needs of the country. The effects of this financial derangement, consequent on the fall of the exchange, were not confined to the Government of India. They were immediately felt by the municipalities and other local bodies who were dependent upon the Government for financial aid. So long as the cash balances were overflowing in the Treasury of the Government, “one of the most useful ways” to employ them was found in lending a portion of them to these local institutions. As they had just then been inaugurated under the local self-government policy of Lord Ripon's régime, and were looked upon only as an experiment, their taxing and borrowing powers were rigidly limited. Consequently, this financial aid from the Central Government by way of temporary advances was a resource of inestimable value to them. When, however, the cash balances of the Central Government began to diminish owing to the continued losses by exchange, these facilities were severely¹⁷² curtailed, so that the very vitality of these institutions was threatened just at the moment when they needed all help to foster their growth and strengthen their foundations.

Addressing the Secretary of State, the Government of India, in a despatch of February 2, 1886, observed¹⁷³:—

“10. We do not hesitate to repeat that the facts set forth in the preceding paragraphs are, from the point of Indian interests, intolerable; and the evils which we have enumerated do not exhaust the catalogue. Uncertainty regarding the future of silver discourages the investment of capital in India, and we find it impossible to borrow in silver except at an excessive cost.

“On the other hand, the Frontier and Famine Railways which we propose to construct, and the Coast and Frontier defences which we have planned, are imperatively required and cannot be postponed indefinitely.

“We are forced, therefore, either to increase our sterling liabilities, to which course there are so many objections, or [pg 96] to do without the railways required for the commercial development of the country, and its protection against invasion and the effects of famine.

――――――――

“11. Nor can the difficulties which local bodies experience in borrowing in India be overlooked. The Municipalities of Bombay and Calcutta require large sums for sanitary improvements, but the high rate of interest which they must pay for silver loans operates to deter them from undertaking expensive works, and we need hardly remind your Lordship that it has quite recently been found necessary for Government to undertake to lend the money required for the construction of docks at Calcutta and Bombay, and that when the Port Commissioners of Calcutta attempted to raise a loan of 75 lakhs of rupees in September, 1885, guaranteed by the Government of India, the total amount of tenders was only Rs. 40,200, and no portion of this insignificant amount was offered at par. …”

The importation of capital on private account was hampered for similar reasons, to the great detriment of the country. It was urged on all hands, and was even recommended by a Royal Commission,¹⁷⁴ that one avenue of escape from the ravages of recurring famines, to which India so pitifully succumbed at such frequent intervals, was the diversification of her industries. To be of any permanent benefit such diversified industrial life could be based on a capitalistic basis alone. But that depended upon the flow of capital into the country as freely as the needs of the country required. As matters then stood, the English investor, the largest purveyor of capital, looked upon the investment of capital in India as a risky proposition. It was feared that once the capital was spread out in a silver country every fall in the price of silver would not only make the return uncertain when drawn in gold, but would also reduce the capital value of his investment in terms of gold, which was naturally the unit in which he measured all his returns and his outlays. This check to the free [pg 97] inflow of capital was undoubtedly the most serious evil arising out of the rupture of the par of exchange.

Another group of people who suffered from the fall of exchange because of their obligation to make gold payments was composed of the European members of the Civil Service in India. Like the Government to which they belonged, they received their salaries in silver, but had to make gold remittances in support of their families, who were often left behind in England. Before 1873, when the price of silver in terms of gold was fixed, this circumstance was of no moment to them. But as the rupee began to fall the face of the situation was completely altered. With every fall in the value of silver they had to pay more rupees out of their fixed salaries to obtain the same amount of gold. Some relief was no doubt given to them in the matter of their remittances. The Civil Servants were permitted, at a sacrifice to the Government, to make their remittances at what was called the Official Rate of Exchange.¹⁷⁵ It is true the difference between the market rate and the official rate was not very considerable. None the less, it was appreciable enough for the Civil Servants to have gained by 2½ per cent. on the average of the years 1862–90¹⁷⁶ at the cost of the Government. The Military Servants obtained a similar relief to a greater degree, but in a different way. Their salary was fixed in sterling, though payable in rupees. It is true the Royal Warrant which fixed their salary also fixed the rate of exchange between the sterling and the rupee for that purpose. But as it invariably happened that the rate [pg 98] of exchange fixed by the Warrant was higher than the market rate the Military Servants were compensated to the extent of the difference at the cost of the Indian Exchequer.¹⁷⁷ This relief was, comparatively speaking, no relief to them. The official or the warrant rates of exchange, though better than the market rates of exchange, were much lower than the rate at which they were used to make their remittances before 1873. Their burden, like that of the Government, grew with the fall of silver, and as their burden increased their attitude became alarmist. Many were the memorialists who demanded from the Government adequate compensation for their losses on exchange.¹⁷⁸ The Government was warned¹⁷⁹ that

“the ignorant folk who think India would be benefited by lowering present salaries are seemingly unable to comprehend that such a step would render existence on this reduced pay simply impossible, and that recourse would of necessity be had to other methods of raising money.”

Such, no doubt, was the case in the earlier days of the East India Company, when the Civil Servants fattened on pickings because their pay was small,¹⁸⁰ and it was to put a stop to their extortions that their salaries were raised to what appears an extraordinary level. That such former instances of extortions should have been held out as monitions showed too well how discontented the Civil Service was owing to its losses through exchange.

Quite a different effect the fall had on the trade and industry of the country. It was in a flourishing state as [pg 99] compared with the affairs of the Government or with the trade and industry of a gold-standard country like England. Throughout the period of falling silver there was said to be a progressive decline relatively to population in the employment afforded by various trades and industries in England. The textile manufactures and the iron and coal trade were depressed as well as the other important trades, including the hardware manufactures of Birmingham and Sheffield, the sugar-refining of Greenock, Liverpool, and London, the manufactures of earthenware, glass, leather, paper, and a multitude of minor industries.¹⁸¹ The depression in English agriculture was so widespread that the Commissioners of 1892 were “unable to point to any part of the country in which [the effects of the depression] can be said to be entirely absent,” and this notwithstanding the fact that the seasons since 1882 “were on the whole satisfactory from an agricultural point of view.”¹⁸² Just the reverse was the case with Indian trade and industry. The foreign trade of [pg 100]

TABLE XIV

Imports and Exports (Both Merchandise and Treasure)¹⁸³

Year.	Exports.	Imports.		Year.	Exports.	Imports.
1870–71	57,556,951	39,913,942		1881–82	83,068,198	60,436,155
1871–72	64,685,376	43,665,663		1882–83	84,527,182	65,548,868
1872–73	56,548,842	36,431,210		1883–84	89,186,397	68,157,311
1873–74	56,910,081	39,612,362		1884–85	85,225,922	69,591,269
1874–75	57,984,549	44,363,160		1885–86	84,989,502	71,133,666
1875–76	60,291,731	44,192,378		1886–87	90,190,633	72,830,670
1876–77	65,043,789	48,876,751		1887–88	92,148,279	78,830,468
1877–78	67,433,324	58,819,644		1888–89	98,333,879	83,285,427
1878–79	64,919,741	44,857,343		1889–90	105,366,720	86,656,990
1879–80	69,247,511	52,821,398		1890–91	102,350,526	93,909,856
1880–81	76,021,043	62,104,984		1891–92	111,460,278	84,155,045

TABLE XV

Nature of Industrial Pursuits in England and India¹⁸⁴

	Distribution of Indian Exports exclusive of Treasure.					Distribution of English Exports exclusive of Treasure.
	Manufactured Articles.	Raw Materials.	Food Articles.	Unclassified Articles.	Total.	Manufactured Articles.	Raw Materials.	Food Articles.	Unclassified Articles.	Total.
1857	11	34	22	23	100	90·9	4	4·9	·2	100
1858	6	35	26	33	100	91·4	3·4	5·1	·1	100
1859	6·5	40	15·5	38	100	91·5	3·8	4·6	·1	100
1860	5·7	43·6	17·7	33	100	91·9	3·6	4·4	·3	100
1861	5·8	46·5	15·3	32·4	100	90·4	4·8	4·8	—	100
1862	5	52	16	27	100	90·3	4	4·8	·9	100
1863	3·7	58·7	10·6	27	100	91·0	4	4	1·0	100
1864	4	69·2	9·3	17·5	100	92·5	3·7	3·7	·1	100
1865	3·5	68	12	16·6	100	92·1	3·6	3·6	·7	100
1866	4·2	67·2	10·3	18·3	100	92	3·7	3·7	·4	100
1867	4	58	11	27	100	92·2	3·8	3·7	·3	100
1868	4	58·5	11·5	26	100	92	4·4	3·4	·2	100
1869	4·8	60·5	14	20·7	100	92	4·2	3·1	·7	100
1870	4·4	63·6	9	23	100	91	4	4	1·0	100
1871	3·7	65·3	11	20	100	90	4·4	4·9	·7	100
1872	3·3	61·4	13·5	21·8	100	91·2	5·4	3·5	·9	100

[pg 101] the country, which had bounced up during the American Civil War, showed greater buoyancy after 1870, and continued to grow throughout the period of the falling exchange at a rapid pace. During the short space of twenty years the total imports and exports of the country more than doubled in their magnitude, as is shown by Table XIV., p. 99.

Not only had the trade of India been increasing, but the nature of her industries was also at the same time undergoing a profound change. Prior to 1870 India and England were, so to say, non-competing groups. Owing to the protectionist policy of the Navigation Laws, and owing also to the substitution of man by machinery in the field of production, India had become exclusively an agricultural and a raw-material-producing country, while England had transformed herself into a country which devoted all her energy and her resources to the manufacturing of raw materials imported from abroad into finished goods. How marked was the contrast in the industrial pursuits in the two countries is well revealed by the analysis of their respective exports on opposite page.

After 1870 this distribution of their industrial pursuits was greatly altered, and India once again began to assume the rôle of a manufacturing country. Analysing the figures for Indian imports and exports for the twenty years succeeding 1870 (see table below), we find that the progress in [pg 102] the direction of manufactures formed one of the most significant features of the period.

TABLE XVI

Changes in Industrial Pursuits of India¹⁸⁵

Years	Imports.		Exports.
	Manufactured.	Raw.	Manufactured.	Raw.
	Rs.	Rs.	Rs.	Rs.
1879	25,98,65,827	13,75,55,837	5,27,80,340	59,67,27,991
1892	36,22,31,872	26,38,18,431	16,42,47,566	85,52,09,499
Percentage of increase
Total	39	91	211	43
Annual	2·8	6·5	15	3

This change in the industrial evolution was marked by the growth of two principal manufactures. One of them was the manufacture of cotton. The cotton industry was one of the oldest industries of India, but during 100 years between 1750 and 1850 it had fallen into a complete state of decrepitude. Attempts were made to resuscitate the industry on a capitalistic basis in the sixties of the nineteenth century and soon showed signs of rapid advance. The story of its progress is graphically illustrated in the following summary table:—

TABLE XVII

The Development of Indian Cotton Trade and Industry

	Growth of Trade (Average Annual Quantities in each Quinquennium).
	1870–71 to 1874–75.	1875–76 to 1879–80.	1880–81 to 1884–85.	1885–86 to 1889–90.	1890–91 to 1894–95.
Imports of raw cotton—thousands of cwts.	23	52	51	74	89
Exports of raw cotton—thousands of cwts.	5,236	3,988	5,477	5,330	4,660
Imports of twist and yarn	33·55	33·55	44·34	49·09	44·79
	Growth of Industry (at end of each fifth year).
Number of mills	48	58	81	114	143
Number of spindles—000 omitted	1,000	1,471	2,037	2,935	3,712
Number of looms—000 omitted	10	13	16	22	34
Number of persons employed	—	39,537	61,836	99,224	—

Another industry which figured largely in this expansion of Indian manufactures was jute. Unlike the cotton industry [pg 103] of India, the jute industry was of a comparatively recent origin. Its growth, different from that of the cotton industry, was fostered by the application of European capital, European management, and European skill, and it soon took as deep roots as the cotton industry and flourished as well as it did, if not better. Its history was one of continued progress.

TABLE XVIII

Development of Jute Industry and Trade

Growth of Trade.	Average Annual of each Quinquennium.
	1870–71 to 1874–75.	1875–76 to 1879–80.	1880–81 to 1884–85.	1885–86 to 1889–90.	1890–91 to 1894–95.
Exports—
Raw, million cwt.	5·72	5·58	7·81	9·31	10·54
Gunny bags, millions.	6·44	35·96	60·32	79·98	120·74
Cloth, million yds.	—	4·71	6·44	19·79	54·20
Growth of Industry.
Number of —
Mills	—	21	21	24	26
Looms, 000 omitted	—	5·5	5·5	7	8·3
Spindles, 000 omitted	—	88	88	138·4	172·4
Persons employed, in thousands	—	38·8	38·8	52·7	64·3

This increasing trend towards manufactures was not without its indirect effects on the course of Indian agriculture. Prior to 1870 the Indian farmer, it may be said, had no commercial outlook. He cultivated not so much for profit as for individual self-sufficiency. After 1870 farming tended to become a business and crops came more and more to be determined by the course of market prices than by the household needs of the farmer. [pg 104]

TABLE XIX

Growth of Agricultural Exports of India

	1868–69.	1873–74.	1877–78.	1882–83.	1887–88.	1891–92.
Wheat	100	637·41	2,313·47	5,152·36	4,914·37	11,001·44
Opium	100	118·38	123·83	122·47	120·20	116·82
Seeds	100	111·26	305·87	239·97	403·60	480·99
Rice	100	131·66	119·84	203·28	185·55	220·36
Indigo	100	116·91	121·57	142·17	140·76	126·33
Tea	100	169·35	293·17	507·25	775·09	1,075·75
Coffee	100	86·04	69·98	85·31	64·59	74·11

Such was the contrast in the economic conditions prevalent in the two countries. This peculiar phenomenon of a silver standard country steadily progressing, and a gold-standard country tending to a standstill, exercised the minds of many of its observers. The chief cause was said to be the inability of the English manufacturers to hold out in international competition. This inability to compete with his European rivals was attributed to the prevalence of protective tariffs and subsidies which formed an essential part of the industrial and commercial code of the European countries. Nothing of the kind then existed in India, where trade was as free and industry as unprotected as any could have been, and yet the Lancashire cotton-spinner, the Dundee jute manufacturer, and the English wheat-grower complained that they could not compete with their rivals in India. The cause, in this case, was supposed to be the falling exchange.¹⁸⁶ So much were some people impressed by this view that even the extension of the Indian trade to the Far East was attributed to this cause. Already, it was alleged, the dislocation of the par of exchange between gold and silver had produced a kind of segregation of gold-using countries and silver-using countries to the exclusion of each other. In a transaction between two countries using the same metal as standard it was said the element of uncertainty arising from the use of two metals varying in terms of each other [pg 105] was eliminated. Trade between two such countries could be carried on with less risk and less inconvenience than between two countries using different standards, as in the latter case the uncertainty entered into every transaction and added to the expense of the machinery by which trade was carried on. That the Indian trade should have been deflected to other quarters¹⁸⁷ where, owing to the existence of a common standard the situation trade had to deal with was immune from uncertainties, was readily admitted. But it was contended that there was no reason why, as a part of the segregation of commerce it should have been possible for the Indian manufacturer to oust his English rival from the Eastern markets to the extent he was able to do (see Table XX, p. 106). [pg 106]

TABLE XX

Exports of Cotton Goods to Eastern Markets

Years.	Yarn, lb., 000 omitted.		Piece-goods, yds., 000 omitted.
	From India.	From U.K.	From India.	From U.K.
1877	7,927	33,086	15,544	394,489
1878	15,600	36,467	17,545	382,330
1879	21,332	38,951	22,517	523,921
1880	25,862	46,426	25,800	509,099
1881	26,901	47,479	30,424	587,177
1882	30,786	34,370	29,911	454,948
1883	45,378	33,499	41,534	415,956
1884	49,877	38,856	55,565	439,937
1885	65,897	33,061	47,909	562,339
1886	78,242	26,924	51,578	490,451
1887	91,804	35,354	53,406	618,146
1888	113,451	44,643	69,486	652,404
1889	128,907	35,720	70,265	557,004
1890	141,950	37,869	59,496	633,606
1891	169,253	27,971	67,666	595,258

The causes which effected such trade disturbances formed the subject of a heated controversy.¹⁸⁸ The point in dispute was whether the changes in international trade such as they were, were attributable to the monetary disturbances of the time. Those who held to the affirmative explained their position by arguing that the falling exchange gave a bounty to the Indian producer and imposed a penalty on the English producer. The existence of this bounty, which was said to be responsible for the shifting of the position of established competitors in the field of international commerce, was based on a simple calculation. It was said that if the gold value of silver fell the Indian exporter got more rupees for his produce and was therefore better off, while by reason of the same fact the English producer got fewer sovereigns and was therefore worse off. Put in [pg 107] this naïve form the argument that the falling exchange gave a bounty to the Indian exporters and imposed a penalty on the English exporters had all the finality of a rule of arithmetic. Indeed, so axiomatic was the formula regarded by its authors that some important inferences as to its bearing on the trade and industrial situation of the time were drawn from it. One such inference was that it stimulated exports from and hindered imports into the silver using countries. The second inference was that the fall of exchange exposed some English producers more than others to competition from their rivals in silver-using countries. Now, can such results be said to follow from the fall of exchange? If we go behind the bald statement of a fall of exchange and inquire as to what determined the gold price of silver the above inferences appear quite untenable. That the ratio between gold and silver was simply the inverse of the ratio between gold prices and silver prices must be taken to be an unquestionable proposition. If therefore the gold price of silver was falling it was a counterpart of the more general phenomenon of the fall of the English prices which were measured in gold, and the rise of the Indian prices which were measured in silver. Given such an interpretation of the event of the falling exchange, it is difficult to understand how it can help to increase exports and diminish imports. International trade is governed by the relative advantages which one country has over another, and the terms on which it is carried on are regulated by the comparative cost of articles that enter into it. It is, therefore, obvious that there cannot be a change in the real terms of trade between countries except as a result of changes in the comparative cost of these goods. Given a fall in gold prices all round, accompanied by a rise in silver prices all round, there was hardly anything in the monetary disturbance that could be said to have enabled India to increase her exportation of anything except by diminishing her exportation or increasing her importation of something else. From the same view of the question of the falling exchange it follows that such a monetary disturbance could not depress one trade more than another. If the falling or rising exchange was simply [pg 108] an expression of the level of general prices, then the producers of all articles were equally affected. There was no reason why the cotton trade or the wheat trade should have been more affected by the fall of exchange than the cutlery trade.

Not only was there nothing in the exchange disturbance to disestablish existing trade relations in general or in respect of particular commodities, but there was nothing in it to cause benefit to the Indian producer and injury to the English producer. Given the fact that the exchange was a ratio of the two price-levels, it is difficult to see in what sense the English producer, who got fewer sovereigns but of high purchasing power, was worse off than the Indian producer, who got more rupees but of low purchasing power. The analogy of Prof. Marshall was very apt. To suppose that a fall of exchange resulted in a loss to the former and a gain to the latter was to suppose that, if a man was in the cabin of a ship only ten feet high, his head would be broken if the ship sank down twelve feet into a trough. The fallacy consisted in isolating the man from the ship when, as a matter of fact, the same force, acting upon the ship and the passenger at one and the same time, produced like movements in both. In like manner the same force acted upon the Indian producer and the English producer together, for the change in the exchange was itself a part of the more sweeping change in the general price-levels of the two countries. Thus stated, the position of the English and Indian producer was equally good or equally bad, and the only difference was that the former used fewer counters and the latter a larger number in their respective dealings.

A bounty to the Indian producer and a penalty to the English producer, it is obvious, could have arisen only if the fall of silver in England in terms of gold was greater than the fall of silver in terms of commodities in India. In that case the Indian producer would have obtained a clear benefit by exchanging his wares for silver in England and thus securing a medium which had a greater command over goods and services in India. But à priori there could be no justification for such an assumption. There was no reason why gold price of silver should have fallen at a different [pg 109] rate from the gold price of commodities in general, or that there should have been a great difference between the silver prices in England and in India. Statistics show that such à priori assumptions were not groundless.

It is obvious that if silver was falling faster than commodities, and if silver prices in India were lower than silver prices in England, we should have found it evidenced by an inflow of silver from England to India. What were the facts? Not only was there no extraordinary flow of silver to India, but the imports of silver during 1871–93 were much smaller than in the twenty years previous to that period.¹⁸⁹ This is as complete a demonstration as could be had of the fact that the silver prices in India were the same as they were outside, and consequently the Indian producer had very little chance of a bounty on his trade.

Although such must be said to be the à priori view of the question, the Indian producer was convinced that his prosperity was due to the bounty he received. Holding such a position he was naturally opposed to any reform of the Indian currency, for the falling exchange which the Government regarded a curse he considered a boon. But however plausible was the view of the Indian producer, much sympathy would not have been felt for it had it not been coupled with a notion, most commonly held, that the bounty arose from the export trade, so that it became an article of popular faith that the fall of exchange was a source of gain to the nation as a whole. Now was it true that the bounty arose from the export trade? If it were so, then every fall of exchange ought to give a bounty. But supposing that the depreciation of silver had taken place in India before it had taken place in Europe, could the fall of exchange thus brought about have given a bounty to the Indian exporter? As was explained above, the Indian exporter stood a chance of getting a bounty only if with the silver he obtained for his produce he was able to buy more goods and [pg 110]

TABLE XXI

Movements of Prices, Wages and Silver Between India and England¹⁹⁰

Net Imports of Silver into India.		Index No. for Gold Price of Silver.	Years.	Index No. for Silver Prices of Commodities in India.	Index No. for Wages in India.	Index No. for Gold Prices of Commodities in England.	Index No. for Wages in England
Years.	Amount. Rs.
(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
1871–72	6,587,296	99·7	1871	100	—	100	100
1872–73	739,244	99·2	1872	105	—	109	105·8
1873–74	2,530,824	97·4	1873	107	100	111	112
1874–75	4,674,791	95·8	1874	116	101	102	113
1875–76	1,640,445	93·3	1875	103	97	96	111·6
1876–77	7,286,188	86·4	1876	107	98	95	110
1877–78	14,732,194	90·2	1877	138	97	94	109·8
1878–79	4,057,377	86·4	1878	148	99	87	107
1879–80	7,976,063	84·2	1879	135	100	83	105·8
1880–81	3,923,612	85·9	1880	117	99	88	106·5
1881–82	5,381,410	85·0	1881	106	99	85	106·5
1882–83	7,541,427	84·9	1882	105	100	84	106·5
1883–84	6,433,886	83·1	1883	106	102	82	108
1884–85	7,319,581	83·3	1884	114	101	76	109
1885–86	11,627,028	79·9	1885	113	106	72	108
1886–87	7,191,743	74·6	1886	110	105	69	107
1887–88	9,319,421	73·3	1887	111	114	68	108
1888–89	9,327,529	70·4	1888	119	112	70	109·8
1889–90	11,002,078	70·2	1889	125	112	72	113
1890–91	14,211,408	78·4	1890	125	113	72	118
1891–92	9,165,684	74·3	1891	128	118	72	118
1892–93	12,893,499	65·5	1892	141	110	68	117·4
1893–94	13,759,273	58·5	1893	138	119	68	117·4

[pg 111] services in India. To put the same in simpler language, his bounty was the difference between the price of his product and the price of his outlay. Bearing this in mind, we can confidently assert that in the supposed case of depreciation of silver having taken place in India first, such a fall in the Indian exchange would have been accompanied by a penalty instead of a bounty on his trade. In that case the exporter from India would have found that though the Indian exchange, i.e. the gold price of silver, had fallen, yet the ratio which gold prices in England bore to silver prices in India had fallen more, i.e. the price he received for his product was smaller than the outlay he had incurred. It is not quite established whether silver had fallen in Europe before it had fallen in India.¹⁹¹ But even if that were so the possibility of a penalty through the fall of exchange proves that the bounty, if there was any, was not a bounty on the export trade as such, but was an outcome of the disharmony between the general level of prices and the prices of particular goods and services within the country, and would have existed even if the country had no export trade.

Thus the bounty was but an incident of the general depreciation of the currency. Its existence was felt because prices of all goods and services in India did not move in the same uniform manner. It is well known that at any one time prices of certain commodities will be rising, while the general price level is falling. On the other hand, certain goods will decline in price at the same time that the general price level is rising. But such opposite movements are rare. What most often happens is that prices of some goods and services, though they move in the same direction, yet do not move at the same pace as the general price level. It is notorious that when general prices fall wages and other fixed incomes which form the largest item in the total outlay of every employer do not fall in the same proportion; and when general prices rise they do not rise as fast as general prices, but generally lag behind. And this was just what was happening in a silver-standard country like India and a gold-standard [pg 112] country like England during the period of 1873–93 (see Chart IV). Prices had fallen in England, but wages had not fallen to the same extent. Prices had risen in India, but wages had not risen to the same extent. The English manufacturer was penalized, if at all, not by any act on the part of his Indian rival, but by reason of the wages of the former's employees having remained the same, although the price of his products had fallen. The Indian producer got a bounty, if any, not because he had an English rival to feed upon, but because he did not have to pay higher wages, although the price of his product had risen.

The conclusion, therefore, is that the falling exchange could not have disturbed established trade relations or displaced the commodities that entered into international trade. The utmost that could be attributed to it is its incidence in economic incentive. But in so far as it supplied a motive force or took away the incentive, it did so by bringing about changes in the social distribution of wealth. In the case of England, where prices were falling, it was the employer who suffered; in the case of India, where prices were rising, it was the wage-earner who suffered. In both cases there was an injustice done to a part of the community and an easy case for the reform of currency was made out. The need for a currency reform was recognized in England; but in India many people seemed averse to it. To some the stability of the silver standard had made a powerful appeal, for they failed to find any evidence of Indian prices having risen above the level of 1873. To others the bounty of the falling exchange was too great a boon to be easily given away by stabilizing the exchange. The falsity of both the views is patent. Prices in India did rise, and that, too, considerably. Bounty perhaps there was, but it was a penalty on the wage-earner. Thus viewed, the need for the reform of Indian currency was far more urgent than could have been said of the English currency. From a purely psychological point of view there is probably much to choose between rising prices and falling prices. But from the point of view of their incidence on the distribution of wealth, very little can be said in favour of a standard which changes in its [pg 113] value and which becomes the via media of transferring wealth from the relatively poor to the relatively rich. Scrope said: “Without stability of value money is a fraud.” Surely, having regard to the magnitude of the interests affected, depreciated money must be regarded as a greater fraud. That being so, the prosperity of Indian trade and industry, far from being evidence of a sound currency, was sustained by reason of the fact that the currency was a diseased currency. The fall of exchange, in so far as it was a gain, registered a loss to a large section of the Indian people with fixed incomes who suffered from the instability of the silver standard equally with the Government and its European officers.

So much for the fall of silver. But the financial difficulties and social injustices it caused did not sum up the evil effects produced by it. Far more disturbing than the fall were the fluctuations which accompanied the fall (see Chart V).

The fluctuations greatly aggravated the embarrassment of the Government of India caused by the fall in the exchange value of the rupee. In the opinion of the Hon. Mr. Baring (afterwards Lord Cromer),¹⁹²

“It is not the fact that the value of the rupee is, comparatively speaking, low that causes inconvenience. It would be possible, although it might be exceedingly troublesome, to adjust the Indian fiscal system to a rupee of any value. What causes inconvenience alike to Government and to trade is that the value of the rupee is unstable. It is impossible to state accurately in Indian currency what the annual liabilities of the Government of India are. These liabilities have to be calculated afresh every year according to the variations which take place in the relative value of gold and silver, and a calculation which will hold good for even one year is exceedingly difficult to make.”

Owing to such fluctuations, no rate could be assumed in the Budget which was likely to turn out to be the true market rate. As matters stood, the rate realized on an average during a particular year differed so widely from the Budget rate that the finances of the Government became, to [pg 114] employ the phraseology of a finance minister, a “veritable gamble.” How greatly the annual Budget must have been deranged by the sudden and unprovided-for changes in the rupee cost of the sterling payments the table on opposite page may help to give some idea.

If Government finance was subjected to such uncertainties as a result of exchange fluctuations, private trade also became more or less a matter of speculation. Fluctuations in exchange are, of course, a common incident of international trade. But if they are not to produce discontinuity in trade and industry there must be definite limits to such fluctuations. If the limits are ascertainable, trade would be reasonably certain in its calculation, and speculation in exchange would be limited within the known limits of deviations from an established par. Where, on the other hand, the limits are unknown all calculations of trade are frustrated and speculation in exchange takes the place of legitimate trading. Now, it is obvious that fluctuations in the exchange between two countries will be limited in extent if the two countries have the same standard of value. Where there is no such common standard of value the limits, though they exist, are too indefinite to be of much practical use. The rupture of the fixed par of exchange, having destroyed a common standard of value between gold and silver countries, removed the limits on the exchange fluctuations between such countries. As a result of such variations in the value of the standard measure, trade advanced by “rushes and pauses,” and speculation became feverishly active.¹⁹³

That progress of trade depends on stability is a truism which seldom comes home until it is denied in fact. It is difficult to appreciate its importance to healthy enterprise when government is stable, credit secure, and conditions are uniform. And yet so great is the handicap of instability that everywhere business men have been led by a variety of devices to produce stability in domains enveloped by uncertainty. Everywhere there have grown up business barometers forewarning business men of impending changes and so enabling them to forearm against them by timely [pg 115]

TABLE XXII

Fluctuations of Exchange and Fluctuations in the Rupee Cost of Gold Payments¹⁹⁴

Financial Year.	Estimated Rate of Exchange on which the Budget of the Year was framed.		Rate of Exchange actually realized on the Average during the Year.		Changes in the Rupee Cost of Sterling Payments consequent upon Changes between the Estimated and the Realized rates of Exchange.
	s.	d.	s.	d.	Rs.	Rs.
1874–75	1	10·375	1	10·156	15,91,764	—
1875–76	1	9·875	1	9·626	19,57,917	—
1876–77	1	8·5	1	8·508	—	76,736
1877–78	1	9·23	1	8·791	38,43,050	—
1878–79	1	8·4	1	7·794	56,87,129	—
1879–80	1	7	1	7·961	—	84,40,737
1880–81	1	8	1	7·956	4,24,722	—
1881–82	1	8	1	7·895	10,17,482	—
1882–83	1	8	1	7·525	37,46,890	—
1883–84	1	7·5	1	7·536	—	3,62,902
1884–85	1	7·5	1	7·308	18,97,307	—
1885–86	1	7	1	6·254	56,82,638	—
1886–87	1	6	1	5·441	65,17,721	—
1887–88	1	5·5	1	4·898	71,90,097	—
1888–89	1	4·9	1	4·379	77,98,400	—
1889–90	1	4·38	1	4·566	—	27,31,892
1890–91	1	4·552	1	6·09	—	2,35,51,744
1891–92	1	5·25	1	4·733	80,09,366	—

[pg 116] changes in their operations. The whole of insurance business is aimed at giving stability to economic life. The necessity which compelled all regularly established Governments to maintain standard measures by which the true proportion between things as to their quantities might be ascertained and dealings in them regulated with certainty was motivated by the same purpose, and the meticulous precision with which every civilized country defines its standard measures, and the large machinery it maintains to preserve them from deviation, are only evidences of the great importance that an economic society must continue to attach to the matter of providing precision of expression and assurance of fulfilment with regard to the contracts entered into by its members in their individual or corporate capacities. Important as are the standard measures of a community, its measure of value is by far the most important of them all.¹⁹⁵ The measures of weight, extension, or volume enter only into particular transactions. If the pound, the bushel, or the yard were altered the evils would be comparatively restricted in scope. But the measure of value is all-pervading.

“There is no contract,” Peel declared,”¹⁹⁶ public or private, no engagement national or individual, which is unaffected by it. The enterprises of commerce, the profits of trade, the arrangements made in all domestic relations of society, the wages of labour, pecuniary transactions of the highest amount and of the lowest, the payment of national debt, the provision for national expenditure, the command which the coin of the smallest denomination has over the necessaries of life, are all affected”

by changes in the measure of value. This is because every contract, though ultimately a contract in goods, is primarily a contract in value. It is, therefore, not enough to maintain constancy in the measures of weight, capacity, or volume. A contract as one of goods may remain exact to the measure [pg 117] stipulated, but may nevertheless be vitiated as a contract in values by reason of changes in the measure of values. The necessity of preserving stability in its measure of value falls on the shoulders of every Government of an orderly society. But its importance grows beyond dispute as society advances from status to contract. The conservation of the contractual basis of society then becomes tantamount to the conservation of an invariable measure of value.

The work of reconstituting a common measure of value in some form or other which those misguided legislators of the seventies helped to destroy, it was found, could not be long delayed with impunity. The consequences that followed in the wake of that legislation, as recounted before, were too severe to allow the situation to remain unrectified. That efforts for reconstruction should have been launched before much mischief was done only shows that a world linked by ties of trade will insist, if it can, that its currency systems must be laid on a common gauge. [pg 118]